Matching inefficiencies, regional disparities and unemployment

In this paper we apply a stochastic frontier approach to examine how matching efficiency and regional differences in structural factors contribute to regional and aggregate unemployment. Our results suggest that there would be a substantial decline in aggregate unemployment if (i) all local labour offices operated with full efficiency or (ii) they shared the same structure of job seekers and vacant jobs as the most favourable office. In the former case an increase in hirings would lower the average unemployment rate by 2.4 percentage points. In the latter case the decrease would be 1.4 percentage points. Further, we find that fixed effects are positively c0orrelated with both a more favourable structure and higher efficiency. This suggests that the fixed effects may capture some part of time invariant features in the structure and efficiency. Thus, the role of structural factors and efficiency in regional unemployment disparities may be higher than estimated.