How Do the Skilled and the Unskilled Respond to Regional Shocks? The Case of SpainWP/98/77-EA WP/98/77 Summary Spain is characterized by large and persistent geographic unemployment differences, which suggest that the labor market adjusts exceedingly slowly to past shocks. The present study argues that under current labor market arrangements there is no tendency for geographic unemployment differences to be reduced in the period ahead. In particular, the current wage-bargaining system tends to yield uniform wage increases across the country, regardless of local labor market conditions. With similar real wages and unit labor costs in high-unemployment and low-unemployment areas, neither workers nor capital have sufficient .price. incentives to move. This study also analyzes how workers with different skill levels respond to local labor demand shocks. That question is addressed using a unique data set on working-age population, labor force, and employment for five educational groups (ranging from the illiterate to the college-educated) over 1964-92 for the 50 Spanish provinces. The high-skilled are found to migrate very promptly in response to a decline in local labor demand, whereas the low-skilled drop out of the labor force or stay unemployed for a long time. In other words, the results suggest that labor market adjustment is particularly sluggish among the low-skilled. Therefore, labor market and other structural policies should devote particular attention to promoting the mobility of the low-skilled. |