Historic, cultural and economic forces have complicated and confounded ongoing efforts in shaping the European Union (EU) into a coherent whole.  Unemployment in many of the EU regions is one of the most persistent problems that keeps EU from establishing the kind of economic flexibility and stability that United States (by comparison) enjoy.  While a neoclassical model explains the effect of wages (and those who set them) on economic disparity among regions, a Keynesian approach stresses the importance of other dynamic influences, such as technological advancements.

There is a symbiotic relationship between the overarching factors that impact a neoclassical labor market approach.  Armstrong and Taylor, as well as Baddeley, Martin and Tyler, cite the endogenous nature of the neoclassical model that comes from an understanding of the work dynamic between wages and unemployment.  Armstrong and Taylor posit that if external factors, such as strong trade unions, drive wages above the market clearing level, unemployment is inevitable.  This means that unemployment will remain prevalent as long as wages are above the clearing level.  Baddeley, et al, refers to this as to the “vicious cycle” theory.  “Not only may changes in labor market pressure (unemployment) have an effect on wages but equally an acceleration in wage inflation could increase unemployment” (Baddeley, Martin and Taylor, 120). Baddeley, et al, goes on to explain that one precedes the other, meaning that “the current rate of unemployment depends on previous wage changes” (120).

In certain cases the existence of regional economic disparity and unemployment is explained by the existence of obstacles to the free movement of wages (Martin, 38). One this obstacles, trade unions, monopolize labor by establishing a “quota” that sets wages too high.  Minimum wage restriction is another obstacle.  A third obstacle is welfare payments.  As a response, the neoclassical model calls for a policy approach where “the general neoclassical prescription will be to dismantle the obstacles which militate against the free movement of wages.  This will involve legislation limiting the power of trade unions, and also the withdrawal of any minimum wage policies” (McCann, 180).  This theory, however, fails to take into account factors that don’t respond to a legislative or regulatory approach, such as technological advancements or consumer demand.

Armstrong and Taylor put forward a somewhat more atomized view of the issue by means of addressing the impact of technology.  “Technical progress is assumed to be the engine of growth and determines the rate at which output per worker increases over the long run” (Armstrong and Taylor, 65).  A contemporary version of this theory claims “technical progress is both a cause and an effect of growth…” (Armstrong and Taylor, 65). The most pertinent implications of the theory all have to do with the ability of a particular region to accept and adapt technical change to its economic superstructure.  Across the areas where fertile ground is provided for technical advancement, the knowledge gained is shared rapidly and put into effect on a sufficiently wider scale.  Thus, Armstrong and Taylor theorize that industrialized areas with denser populations where, typically, more and better educated individuals reside, are more likely to benefit from technical advancements (Armstrong and Taylor, 86).

This particular disparity phenomenon is common to both the EU and to the United States, where, historically, more populous areas have implemented advances far more effectively and efficiently than rural communities.  Baddeley, et al, cites European demographic statistics from the mid-1990s, which reflects the population/regional prosperity-poverty model.  “Most of the areas with the highest unemployment rates (above 15.5 percent) were in the peripheral areas of the EU: in Ireland, the new eastern German Lander, southern France, Spain and southern Italy.  In contrast, most of the low-unemployment regions (with rates less than 6.5 percent) tended to be more scattered across the EU: in Luxembourg, southern and western Germany, Austria and northern Italy” (Baddeley, et al, 203).  It is a simple but undeniable fact that regions, which are most readily disposed to adapt to change, are the most likely to prosper, thus creating disparity.

Regionally based variances stemming from integration are also at work in an argument put forth in Martin and Tyler, which points to the heightened economic integration between regions.  According to their model, the level of integration that, for example, US have escalates trade and facilitates greater region-based specialization, which is further powered by factors such as reduction in trade barriers and consonance of business regulations (Martin and Tyler, 603).  The resulting specialization feeds the tendency toward economic divergence.  In this view of the neoclassical model, such a situation leaves regional economies particularly prone to instability.  “The penalty of increased regional agglomeration and specialization is that regional economies, being less diversified, are more vulnerable to demand and technology shocks” (Martin and Tyler, 603).

According to a Keynesian model, conditions that bring about regional economic disparities and unemployment aren’t resolvable by labor regulation or governmental impositions.  The interrelationship between labor and product demand creates a situation in which unemployment is involuntary because its causes originate outside the sphere of legislative or regulatory control.  “In these circumstances, movements down the demand curve for labor, in which wage falls are associated with increases in labor demand, are very difficult to effect.  (McCann, 181).

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