Interregional differences in labor market participation

The paper analyzes the variation of gender-specific labor-market participation rates at the regional level. We first develop a search-theoretical model with inter-temporal optimization behavior of agents. The model suggests that a higher regional wage level fosters participation, while higher job insecurity as measured by the unemployment rate discourages workers. Moreover, a high wage dispersion increases the value of search and should lead to higher participation rates. Using a spatial econometric approach we investigate the determinants of gender-specific participation in a comprehensive empirical model where differences between West and East Germany are explicitly accounted for. We generally find that variation in regional participation rates in driven by economic forces. Unemployment depresses labor-market participation of male and female workers in both parts of the country, while a higher wage level stimulates it. This is in line with theoretical predictions. However, contrary to the implications of a model with risk-neutral individuals, our results show that higher wage dispersion in the left tail of the wage distribution tends to lower participation. We conclude that the inter-temporal search-theoretical framework assuming risk-neutral individuals is not able to cover all major aspects of participation behavior. Copyright Springer-Verlag 2006