Get a move on, Europe (Econ 101 demands it!)

So a little bit more about the usefulness of regional statistics in economics. And about how people are just so unwilling to commit to standard economic reasoning (take that last part as being mildly ironic, please).

Europeans don’t like to move. They like to stay where they are, and that’s despite the fact that they like going on holiday. They just don’t like to stay anywhere else. This is obviously not ideal from an economic point of view, because that means that arbitrage between job markets isn’t taking place. That’s why even in Germany – supposedly doing pretty well, right? – you get highly variable unemployment rates. The country average is 5.2% at this point, yet my home state of North-Rhine Westphalia is still at a solid 8.4% (or was in August, because that’s the latest data I could find on this), and the vast Eastern German wasteland (notice that this is irony, yes? Although it’s a big, empty place, at least by German standards) of Mecklenburg-Western Pomerania was at 10.7%. That’s a huge deviation from the country average, more than 5 percentage points, twice as high! Granted, it’s a rural place, so you might be able to come up with an argument involving family farms and all that. Except that Berlin’s actually doing even worse, at 11.7%. And these are the countries that are above the average, so there’s plenty of room for some states to do significantly better as well. Yet nobody feels like taking advantage of that. This is actually a pretty general phenomenon around the continent.

The US is obviously doing much better here, with a common language, fewer cultural barriers and much cheaper gas so truck rentals are much cheaper a solid frontier attitude no unemployment benefits so people can’t just lazily live off the dole whatever deep cultural reason it is that makes people more okay with moving around over here. However, it seems that even the Americans are starting to get wary of going that extra mile.

And you can see in the data that there are differences between states’ unemployment rates:

Those rates move in tandem, in the absolute percentage point differences tend to be smaller in better times than today (although officially, the recession’s been over for quite a while now… funny how that works). Plus, relative differences are similar over time, and that’s what should make people move – a 100% reduction in the unemployment rate from one state to another should provide a pretty solid incentive to relocate. I mean come on people, do we have to make Econ 101 obligatory? Homo Economicus would now better than to ignore these facts.

You could see of course why friends and family would keep people around even in times of economic distress, both in Europe and the US. And I’m not trying to say that they should all start moving around because their behavior simply doesn’t fit the economic theory (or at least a somewhat version of that). I just never realized how strong these differences were not just between adjacent countries, but even within countries. Or rather, I just never paid attention to the fact that most economic models don’t really pay attention to these regional differences; at least most macro models don’t (I at least haven’t seen one with heterogeneous labor markets within the same country that don’t originate from involuntary labor mobility restrictions). So this might be worth thinking about in the context of modelling, if nothing else.

2 thoughts on “Get a move on, Europe (Econ 101 demands it!)

  1. awerther

    This is a very interesting way to look at regional unemployment, which I had not thought of much before. I think that in reality, many people and families are not going to be willing to move just because of a regional unemployment rate. At least in my experiences, most families have much more to their lives than just the jobs that they work, so moving for this singular reason will not always make so much sense. It is an intriguing idea though.

    1. mhupp Post author

      Yeah I agree, it’s absolutely understandable that people don’t want to leave everything behind just because they might find a job somewhere else. I mainly thought that this could have interesting policy implications. Say you wanted to lower the nationwide unemployment rate (or the aggregate European rate for example). Then you could get the same effect from lowering the rate in one region that has far higher-than-average unemployment as you could from lowering the rate across a whole bunch of regions that have close-to-average unemployment. And if you only look at aggregate statistics, you’ll never know which of the two happened.

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