**Table 11.  Ceteris Paribus Regional Differentials (vs. Riga and Riga district**<sup>**a**</sup> **) in Activity, Unemployment Risk and Earnings, 1997 and 2002**

||<br>|**Acti**<br>**men**<br>|**vity**<br> <br>**wo**<br>|percentag<br>**men**<br>|**U**<br>e points<br>**m**<br>|**nemploy**<br>**en**<br>|**ment ris**<br>**wo**<br>|**k**<br>**men**<br>|**Ear**<br>pe<br>**both**<br>|**nings**<br>rcent<br>**genders**<br>|
|---|---|---|---|---|---|---|---|---|---|---|
||1997|2002|1997|2002|1997|2002|1997|2002|1997|2002|
|Vidzeme|-1|-2|2|1|-1|2|-2|3**|-17***|-24***|
|Zemgale|-3|-1|-1|-1|0|3*|-1|1|-16***|-20***|
|Kurzeme|0|-5***|-2|-4***|-6***|4*|-5**|3*|-11***|-21***|
|Latgale|-8***|-11***|-3***|-3***|2|7***|-2|4***|-22***|-34***|

_Notes:_<sup><u>a</u></sup> Riga region includes also Jurmala city, but it is not included in the reference group for this table because it differs strongly from Riga and Riga district in terms of unemployment. Regional effects significant at 10%, 5%, 1% level are denoted by *, **, *** respectively. _Sources:_ Appendix Tables 32-34.

Additional evidence for increasing regional disparities is given by changes in elasticity of the wage curve (responsiveness of wages in main cities and districts to local registered unemployment rates). This indicator has changed from -0.07 in 1997 to -0.23 in 2002 for men, from -0.08 to -0.12 for women, and from -0.07 to -0.18 for both genders.

# **5.  CONCLUSION**

Stronger growth and progress in structural reforms in recent years have created a better environment for job creation in Latvia. The unemployment rate has declined from a peak of about 20 percent in the mid-1990s to 12 percent in 2002 and less than 11 percent in 2003. This trend was driven by employment growth, rather than the declines in labor force participation that characterized the initial phases of the transition to a market economy. Notwithstanding these advances, Latvia’s labor market still suffers from serious problems that require further political initiatives in the years to come.

Unemployment rate remains above the average EU-15 level and ranks high among the new member states. Unemployment has a clear structural component: about 45 percent of unemployed had been without a job for more than 1 year in 2002 and 2003. While this proportion, lower than in Poland, Lithuania, Slovakia, or Italy, is similar to the average EU-15 figure, it represents a serious economic and social challenge when combined with high unemployment rate. Moreover, a significant and growing share of the long-term unemployed end up leaving the labor market instead of being reintegrated into employment, especially in rural areas. Male participation rate is now below the corresponding EU-15 average, signaling discouragement among some (older and unskilled) men laid off in the restructuring process.

There is also a clear geographical dimension to unemployment and underemployment. Higher unemployment in certain backward areas is mainly due to lower job creation and a mismatch of skills of the long-term unemployed rather than higher rates of job destruction. Lack of labor demand in backward areas as a key driver of regional disparities is also confirmed by the negative association between average wages and unemployment rates across regions.

Returns to education have increased rapidly during the transition but there is also evidence of a growing mismatch between labor demand and skills provided by formal education (e.g., technical secondary education). Workers with high levels of education have higher chances to maintain their jobs and to find new ones if unemployed, and this human capital effect is even stronger among the new entrants in the 44