It is unnecessary to demonstrate that in recent years labor market has suffered several shocks from the demand side as well as the supply side, specially due to rapidly insertion of women in the labor market (especially in areas which are both highly populated and feature complex productive structure agglomerates). As an explanation for the increase in the unemployment rate several papers highlight key demand side aspects (as technological change, macroeconomic fluctuations or economic restructuring caused by opening up of the economy to foreign trade) or increases in labor supply.
How much of the unemployment rate is explained by an expansion in labor supply? And how much can be attributed to weaknesses in labor demand? In order to answer these questions, we should make clear that it is not our intention here to present a complete model of the labor market, but just to generate a method to classify different agglomerates according to its behavior “inside the evolution” of their own labor markets.
In our attempt to isolate the impacts of changes in labor demand and the variation of labor supply on regional unemployment levels, we have devised a simple procedure that, in our view, will allow us to pinpoint different circumstances with reference to a specified benchmark.
We will not be using here specific functional forms for the demand for labor and the labor supply. Instead, we will just consider spot observations provided by the Permanent Household Survey (EPH).The benchmark used for comparison refers to a hypothetical position of “maximum” labor demand and “minimum” labor supply. This entails a situation with minimum excess supply of labor (or unemployment).
In the light of criticisms received in a previous paper (Figueras, Arrufat and Diaz, 2002) in what follows we will resort to the use of proportions (rates) and, therefore, we will avoid altogether the use of absolute population figures.