whether or not long-term unemployment is primarily a result of ineffective job search. These two questions will be dealt with in subsequent sections.

As far as the composition of long-term unemployment is concerned, 72 percent of long-term unemployed belong to the prime-age group (25-54). Non-Latvians constitute 58 percent of the long-term unemployed. 28 percent of the long-term unemployed have basic education or less, and another 21 percent have professional basic education (ISCED 2C) or vocational (professional after basic, possibly followed by a fast-track general secondary) education (ISCED 3C, ISCED4A).

# **F. REGIONAL DISPARITIES AND COMMUTING**

There are four major dimensions of geographical disparities in Latvia: (i.) urban – rural; (ii.) Riga region – other territory; (iii.) inter-regional disparities between the five NUTS 3 regions (Riga region, Vidzeme, Zemgale, Kurzeme, Latgale), and (iv.) between 33 NUTS 4 regions (7 main cities and 26 districts).

Income and employment prospects are better in cities than in the countryside and in Riga compared to other cities. The division between urban and rural residents (and also between metropolitan and other areas) reveals itself most clearly as income inequality. According to Household Budget Survey results, per capita income in rural areas in 2000 (as well as per capita consumption expenditure in 2002) was on average just 69 percent of that in cities. This is a very significant fall since 1996, when the rural-urban income ratio was 90 percent.

Although unemployment is higher in Latvia’s urban areas compared to the countryside (13.2 versus 9.0 percent in 2002), intuition that higher wages in cities are being balanced out by lower employment possibilities (as in the classic Harris-Todaro model) is misleading. In fact, according to LFS 2002, the number of paid jobs located in the rural areas is just 50 percent of number of economically active residents, while this ratio is 95 percent in Riga and 79 percent in other cities (see also Appendix Table 8). In other words, employment possibilities are positively rather than negatively correlated with wages.<sup>4</sup> In Riga, where employment prospects are the best, the LFS-based unemployment rate is below average, and the registered unemployment rate is lower than elsewhere (see Figure 13 and Appendix Table 9).

Commuting helps to reduce disparities (Hazans 2004a). Commuting is the way in which the population of rural areas and small cities deals with geographical disparities in wages and unemployment. Appendix Table 10 describes commuting flows between rural and urban areas in Latvia and Lithuania in year 2000. One-third of full-time employees living in Latvian countryside had their jobs in cities (this proportion increased to 40 percent in 2002). More than 40 percent of employees living in small cities near Riga, and about 10 percent of those living in other cities, worked in Riga. Commuters enjoy significant earnings gains. According to calculations using the 2000 LFS, a rural resident commuting a distance of 50 km obtains a 53 percent ceteris paribus gain compared to non-commuters. A resident of a city outside Riga obtains a 35 percent gain (see Hazans 2003a, 2004a).

By integrating local labor markets, commuting works to reduce the overall wage gap and disparities in employment prospects between Riga and rural areas, as well as between Riga and other cities. By shifting labor from the countryside to cities, commuting, at least in the short run, increases national output (see Hazans 2004a).

> 4  Consistent with the _wage curve_ model (Blanchflower and Oswald (1994)), especially relevant in the context of inter-regional (rather than urban-rural) disparities; see section 4 for estimates of Latvian wage curve.

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