Twin Peaks in Regional Unemployment and Returns to Scale in Job-Matching in the Czech Republic

The regional distribution of unemployment rates in the Czech Republic during the transition period is shown to be characterised by twin peaks, i.e. a high and a low unemployment equilibrium. The emergence of strong regional disparities at the beginning of the 1990s can, at least partially, be explained by regionally different degrees of competition between the emerging private sector and state-owned enterprises for skilled labour and the role of on-the-job transitions on the parameters of the matching function. This study presents a formalisation of these effects and estimates empirical matching functions for a panel of labour market districts of the Czech Republic between January 1992 and July 1994. When dynamics of unemployment to job exits are taken into account and dynamic panel estimators are applied, the Czech matching function is shown to exhibit increasing returns to scale. This is consistent with the finding of multiple unemployment equilibria.