Regional Unemployment Disparities: Can Fiscal Policy Help?

Nicolaas Groenewold () and A. J. Hagger
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Nicolaas Groenewold: UWA Business School, The University of Western Australia
A. J. Hagger: School of Economics, University of Tasmania

No 03-20, Economics Discussion / Working Papers from The University of Western Australia, Department of Economics

Abstract: Regional unemployment disparities are widely observed, appear to persist through time and are often a reason for concern on the part of both regional and national governments. This paper constructs a small two-region general-equilibrium model and uses it to assess the effectiveness of traditional fiscal policy in combating regional unemployment disparities. The model is based on optimising behaviour of households and firms and incorporates inter-regional migration. It is calibrated using data for the Australian states and then simulated to evaluate the effects of expenditure changes by both regional and federal governments. In particular, we consider (i) a rise in federal government spending in one region, (ii) a rise in regional government spending, (iii) a policy of “unlocking the forests“ in which a regional government increases the availability of regional natural resources, and (iv) a general increase in federal government spending. The results are often surprising – only the fourth policy reduces unemployment in the highunemployment region and all policies exacerbate the disparity.

Pages: 28 pages
Date: 2003
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