Unemployment in East and West Germany: Spatial panel data analysis

The paper assesses factors of regional unemployment and spatial spillover effects in Germany. Using panel data for 407 out of 413 German regions for 2001 through 2009, we explore differences between eastern and western regions in spatial effects. We estimate static and dynamic spatial models by the maximum likelihood estimation approach, elaborated by Lee and Yu (2010). In order to account for possible spatial interactions between regions, we use a spatial weights matrix of inverse distances in the regressions. We base our analysis on a combined set of factors according to equilibrium and disequilibrium views of regional unemployment variance. We find that the unemployment is of both equilibrium and disequilibrium nature. By extending the specification of the dynamic model, we find that the unemployment in eastern regions of Germany affects both the unemployment in western and eastern regions, whereas the unemployment in western regions of Germany has an impact only on other western regions.