Regional Unemployment Disparities: Can Fiscal Policy Help?

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 asmall 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 Jor the Australian states and then simulated to evaluate the effects of expenditure changes by both regional and federal governments. In particular, we consider (iJ arise infederal government spending inoneregion, (ii)arise in regional government spending, (iii) a policy of 'unlocking theforests' in which a regional government increases the availability of regional natural resources, and (ivJ a general increase in federal government spending. The results are often surprising - only the fourth policy reduces unemployment in the high-unemployment region and all policies exacerbate the disparity.