Modelling a Regional Economic System: the Case of Lombardy

Modelling a regional economic system: the case of Lombardy, Regional Studies 41, 19–38. During recent years the demand for quantitative economic investigation to be used for policy analysis has grown rapidly. In addition, the European economic and monetary integration process has increased the economic impact of regional economies, thus calling for analytical instruments aimed at supporting the decision-making process. A regional econometric model of Lombardy’s labour market was set up in which both labour demand and supply are endogenously determined and, thus, unemployment is determined by their interaction. Therefore, labour demand in both the industrial sector and in private services is modelled, while labour supply is split into two components that define, respectively, the participation rate and self-employment. The model simulations evaluate the response of the regional labour market, in comparison with the national one, to exogenous shocks depending on shocks in either demand or supply. The intersectoral difference highlights the fact that industry, although declining in terms of employment, still maintains a crucial role in generating employment multiplier effects, which in turn may reduce unemployment. This evidence has important policy implications as it suggests that industrial policy may play a crucial role in stimulating labour demand and supply, and through this route the whole regional growth process.