employment prospects. In most regions the rate of job destruction still exceeds that of job creation implying net employment loss. If the number of jobs declines, chances to escape unemployment are poor. For example, in Bulgaria it is only the capital region, where employment expands (Rutkowski, 2003b). In Croatia employment grows only in 4 out of 21 regions, and in Poland in 3 out 16 regions (Rutkowski 2003c; World Bank 2001). So employment creation in regions of high unemployment has not picked up.

Regional labor market disparities are not specific to transition countries and occur also in developed market economies. However two factors are specific to European transition economies. First, most transition countries (including Russia) display a degree of variation in unemployment rates generally higher than most Western European countries, let alone the USA. For example, the coefficient of variation of unemployment for France and the USA is roughly half that for the Czech Republic and one third that for Hungary (Boeri and Scarpetta, 1996; Bornhorst and Commander, 2004). These large differences in regional unemployment rates are associated with strong concentration of net job creation in few relatively economically vibrant regions and the dominance of job destruction in most other, economically depressed, regions.

Second, labor market imbalances tend to be highly persistent in transition economies. The ranking of regions by the unemployment rate hardly changes over time. High unemployment regions at the early stage of the transition tend to remain relatively high unemployment regions today. This points to the weakness of equilibrating mechanisms, such as wage adjustment or inter-regional labor mobility to accommodate region specific shocks and lower regional imbalances (Boeri and Scarpetta, 1996; Fidrmuc, 2003, Huber, 2003a; Bornhorst and Commander, 2004).

Why are regional unemployment disparities so large in transition economies? There two factors at work. First, large region specific shocks to product and consequently labor demand. A study of regional unemployment in Poland found that higher unemployment regions are those experiencing greater change in industrial structure. Moreover, high unemployment regions are those with higher inflow rates to unemployment rather than longer spells of unemployment. These findings suggest that regional unemployment varies importantly with job destruction in Poland and thus region specific labor demand shocks (Newell, 2000).

Second, underlying structural factors, which determine regions’ growth potential. These structural factors include sectoral and industrial structure, the degree of urbanization, the development of the infrastructure, and last but not least, human capital endowment. As regions in transition economies differ substantially with respect to their economic structure, these differences translate into differences in labor market conditions. Generally, regions which fare best in terms of job creation and employment prospects are urbanized (especially those with large agglomerations), with a large service sector, with developed infrastructure (both traditional and modern, such as telecommunication networks), and with well educated, skilled workforce. In contrast, regions which fare worst in terms of labor market conditions are industrial regions with obsolete, non-competitive, declining industries (especially heavy industries, such as steel or mining). The performance of agricultural regions is mixed. Agriculture is often an employer of last resort and thus open unemployment in agricultural regions is relatively low, but underemployment is considerable. The issue of factors accounting for regional unemployment inequalities and the typology of regions with respect of their labor market performance is analyzed in more depth in Huber and Scarpetta (1995), Scarpetta (1995), Rutkowski and Przybyla (2002), and Huber (2003b).

How to improve the employment prospects in high unemployment regions? European experience demonstrates that labor mobility and wage flexibility by itself play only a modest role 29