Regional Unemployment Disparities: Can Fiscal Policy Help?

Regional unemployment disparities are widelyobserved, appear to persist throughtime and are often a reason for concern on the part of both regional and nationalgovernments. This paper constructs asmall two-region general-equilibrium modelanduses it toassess theeffectiveness oftraditionalfiscal policy incombating regionalunemployment disparities. The model is based on optimising behaviour ofhouseholds andfirms and incorporates inter-regional migration. It is calibratedusing data Jor the Australian statesand then simulated to evaluate the effects ofexpenditure changes by both regional andfederal governments. In particular, weconsider (iJ arise infederal government spending inoneregion, (ii)arise in regionalgovernment spending, (iii) a policy of 'unlocking theforests' in which a regionalgovernment increases the availability of regional natural resources, and (ivJ ageneral increase infederal government spending. Theresults are oftensurprising- only thefourth policy reduces unemployment in thehigh-unemployment regionandall policies exacerbate thedisparity.