EUROPEAN

!ifi?J!KMC ELSEVIER European Economic Review 41(1997) 581-589

Regional unemployment and labour mobility in the UK

Barry McCormick *

Department of Economics, University of Southampton, Southampton, SO17 IBJ, UK

Abstract

This paper surveys analysis of the relationship between regional unemployment and labour mobility in the UK. A notable feature is the recent rise in the volatility of unemployment in the high wage region of the South East. This is explained by the relative growth of personal sector mortgage indebtedness in that region and greater consumption demand sensitivity to interest rate shocks. Regional unemployment rate differences are largely determined in the manual labour market and show only slight evidence of cyclically corrected convergence. This is underpinned by relatively low migration amongst manual workers, and little sensitivity of out-migration to regional labour market slack. Two regions have experienced persistent employment growth and attracted significant immigration of non-manual labour to low unemployment and increasing relative wage labour markets.0 1997 Elsevier Science B.V.

JEL classification: J61

Keywords: Regional unemployment ; Cyclicity; Migration; Occupational groups; Growing regions;

Mortgage debt

1. Regional unemployment: aggregate patterns, persistence, cyclicity

As regional unemployment has been a focus for policy, whereas mobility is conventionally viewed as facilitating this and other objectives, it is helpful to

* Fax: +44.1703.5938.58.

0014-2921/97/$17.00 Copyright 0 1997 Elsevier Science B.V. All rights reserved. PII SOO14-2921(97)00024-X

582 B. McCormick/European Economic Review 41(1997) 581-589

Table 1

Regional unemployment migration, and relative employment growth rates

Male regional unemployment Net migration a % Emp.

1949 1975 1979 1982 1989 1993 1996 1980-6 1990-l growthb

South East _ 3.0 3.1 8.3 5.2 14.1 10.4

London 1.0 3.1 3.3 8.3 6.7 14.9 12.4

East Anglia - 3.5 3.6 8.7 3.9 14.8 8.7

South West 1.3 4.7 4.7 9.2 5.8 14.4 9.5

East Midlands - 3.6 3.8 10.0 7.3 13.7 10.6

Yorkshire& Humberside 0.7 4.0 4.7 12.4 9.9 15.1 12.3

West Midlands 0.7 4.1 4.6 14.1 8.4 15.2 10.9

Scotland 2.8 5.0 6.4 13.5 12.7 14.0 11.8

Wales 3.9 5.6 6.0 14.3 11.1 14.3 12.2

North 2.5 5.7 7.4 16.3 13.4 17.9 15.1

North West 1.6 5.7 6.0 15.0 12.1 15.9 12.3

1 3.4

5.5 3.8 14.4

10.1 6.6 11.2

3.7 1.5 2.3

-4.2 -1.2 - 2.4

-4.5 -1.5 -3.6

-3.9 2.0 -4.3

-0.1 0.5 - 1.1

- 2.4 -0.8 -7.3

-7.8 - 2.0 - 7.6

- 10.6 2.7

a Net regional in-migration for working age mates (in thousands) for (i) the mean of 1980/l and

1985/6, and (ii) 1990/l.

b Regional employment growth, 1980-90 minus national employment growth over same period.

begin with a picture of regional unemployment. Prior to the last decade regional unemployment rates followed a persistent pattern for about sixty years: relatively high unemployment in the North West, North, Yorkshire, Scotland and Wales, which have specialized in heavy industry, mining, and manufacturing; low unem- ployment in the South, East, and Midlands, where newer manufacturing industries and services are more preponderant. After 1945, the range of regional unemploy- ment rates was typically 3 to 4 percentage points, but increased to twice this level in the 1982 recession. Historically, the range of regional unemployment rates

became greater in a slump as the greater cyclicity of demand in the industrial north and west prompted proportionately more lay-offs and lengthy durations of unem- ployment. This was true in the 1930’s Depression, and in Table 1, columns 3 and

4 illustrate this for the 1979-82 recession. The range of unemployment rates rose from 4.3 at the 1979 cyclical peak to 8 points in the 1982 trough.

The 1982-93 cycle produced major innovations in regional unemployment patterns: 1. during the long upswing, 1982-89, the range of regional unemployment rates

not only failed to decline, but instead increased; 2. during the recession, 1989-93, regional unemployment differentials declined,

and to an unprecedented degree. The virtual elimination of regional differentials by 1993 prompted discussion of

whether this would persist, perhaps as a consequence of reforms to increase labour market flexibility. In the simple sense of persisting in every period this is

implausible since there remains great cyclicity in regional performance as wit- nessed in 1989-93, but performance in 1996 might be regarded as a mid-point of

B. McCormick/ European Economic Review 41 (1997) 581-589 583

the cycle and this suggests a modest narrowing of differentials relative to the mid-1980’s.

While regional labour markets may have a cyclically corrected tendency to converge, the more striking development is that the more prosperous regions in the South and East have become more cyclical relative to other regions. Muellbauer and Murphy (19931, Evans and McCormick (1994), King (1994), and Taylor and Bradley (1994) provide arguments and evidence which suggest that financial liberalization in the 1980’s enabled households to substantially increase borrow- ing, largely against housing equity, and that this process was particularly pro- nounced in the South owing to the large owner-occupied sector, high house prices, and buoyant growth expectations following the strong performance of the South in the 1980-83 recession. Thus the housing and consumption boom, 1986-9, was also sharpest in the South. The unanticipated large increase in interest rates which ended the boom considerably increased mortgage repayments, and reduced dispos- able income. House prices and consumption declined, particularly in the South. The rise in interest payments did not increase spending by depositors by as much as the reduction in spending amongst borrowers, perhaps because of the asymme- try created by the rationing of incremental loans to house owners. Thus it appears that financial liberalization has significantly contributed towards increasing the relative sensitivity of demand in the South to interest rate fluctuations. This view implies (i) that regional unemployment differentials will emerge once again in the next up-turn; (ii> if indebtedness patterns are unchanged, differentials will narrow in the next downturn; (iii) increases in the volatility and length of cycles in certain national economies may lie more with an increase in households’ financial liabilities and greater demand sensitivity to monetary policy, than with compara- tive supply side rigidities.

2. Has migration contributed to reducing trend unemployment differentials?

A statistically consistent summary of census information on inter-regional migration, 1960-90, is provided by Gordon and Molho (1995). The tendency, over the period, 1960-85, is for net migration from the high unemployment regions (Northern, North West, Yorkshire, Wales, Scotland) to the South and East. However, in the 1991 Census this tendency is found to be eliminated and net migration across this “North-South Divide” is negligible. While net migration from the “periphery” is currently at its lowest level for at least 35 years, net migration from high unemployment “conurbation regions” has remained persis- tently high since 1965. The highest rates of net in-migration per head arises in the South West and East Anglia, both of which enjoy high rates of relative employ- ment growth. This Census evidence suggests that migration has contributed to the observed convergence of cyclically corrected unemployment differentials: regions with relatively high unemployment have had low but persistent out-migration until

584 B. McCormick/European Economic Reuiew 41(1997) 581-589

Table 2

Average net migration and unemployment rates for households, 1983-1986 a

Manual Non-manual

net in-migration unemployment net in-migration unemployment

(% p.a.1 (%I (% p.a.1 (o/o)

East Anglia 0.546 9.0 0.490 4.3

South West 0.036 9.7 0.625 3.9

South East -0.251 10.3 -0.127 4.0

East Midlands 0.298 10.6 0.606 4.4

Yorkshire & Humberside - 0.024 15.0 - 0.246 5.2

Scotland 0.012 16.2 0.049 5.3

North West 0.033 16.8 0.039 6.6

West Midlands - 0.060 16.9 0.413 5.7

Wales 0.255 17.1 0.148 5.1

North 0.178 18.1 -0.171 5.5

a The regions are listed in ascending order of the manual unemployment rate. Thus, if workers are

migrating into the low-unemployment regions, we should expect positive figures in the top rows for net

in-migration. Classification of individuals by socioeconomic group was based on the main job of those

who were employed and on the previous job of the unemployed. We adopt the offrciat claimant count

UK definition of unemployment. Source: Hughes and McCormick (1994).

the most recent recession, when with the equalization of regional unemployment rates, net migration into the historically tight labour markets was sharply curtailed. However, evidence from disaggregate data challenges this view.

Table 2 describes Labour Force Survey migration and unemployment data for the mid-cycle period 1983-86 for manual and non-manual workers. Several points follow. First, amongst manual workers a wide variation in unemployment rates exists whereas amongst non-manual workers there is little variation. “Regional

unemployment” is, therefore, a manual worker phenomenon. Secondly, there is little evidence that manual labour is moving to low unemployment markets: on balance, the six regions with high manual unemployment are net absorbers of manual labour. In contrast, non-manual labour is flowing into the lowest unem- ployment rate markets. Finally, whereas absolute net migration rates are on average 0.29% for non-manuals, lower average rates (0.17%) obtain for manuals. Thus low regional unemployment differentials for non-manuals are at least partly brought about by (i) flows in a conventional direction, and (ii) relatively high absolute rates of net migration.

To confirm the relative lack of spatial integration in the UK manual worker market, and to suggest causes, a comparison with the US is helpful. Gross regional migration rates for UK manual workers are low relative to non manuals: whereas 18 in 1000 non-manuals migrate per annum, only 6 in 1000 manuals do so. A migration rate for non-manuals three times that for manuals contrasts sharply with the US where across either a County or State boundary manuals are about 30% more likely to migrate, Hughes and McCormick (1987). Why are UK migration

B. McCormick/European Economic Review 41 (1997) 581-589 585

rates and occupational status correlated inversely to that in the US? Several factors have been considered: the UK tax code disallows income tax credit for individual migration expenses, but allows relief against corporation tax, thereby discriminat- ing in favonr of firm-sponsored migration which is largely non-manual; years of schooling for UK manual workers have been less than those in the US; greater unionization in Britain leads to a stress on “voice” rather than exit, and less migration reinforces the decision to join a union; the public housing system obstructs migration and about half of manual workers are affected; private sector rent controls are more extensive in the UK, regional house price differentials may be greater in the UK.

If balancing migration flows are probably not critical to understanding the trend convergence of regional unemployment rates, to what other arguments might we turn? As a very recent development there is as yet merely a list of potential explanations. One possibility is that the erosion of unemployment benefits and union power have reduced the incentives to queue for jobs in less prosperous areas - Minford (1985) discusses a model which emphasizes these factors as causes of regional unemployment. Secondly, there could have been a fall in the relative mismatch of workers to jobs in the historically depressed regions. Jackman and Roper (1987, table 4) show that unemployment-vacancy mismatch has been greater in high unemployment regions, and McCormick (1991) shows that during the 1980’s the unemployed are more likely to change industry in these regions. Mismatch may now be more evenly distributed across regions. Finally, determi- nants of the natural rate of unemployment may have altered, and the relative improvement in the North may reflect that unemployment associated with manu- facturing turnover may have declined relative to that associated with service industries, given the more stable manufacturing environment.

3. How do regional labour markets adjust to relative demand shocks?

In this literature it has been assumed that relative quantity shocks (for example, (t&employment and output deviations from national means) are the observable manifestations of the regional shock, and then examine how far relative regional wages and the prices of non-nationally traded goods are sensitive to these deviations. The most important non-nationally traded good is taken to be housing. I first summarize how relative quantity shocks are thought to change relative wage and house prices, and then discuss how households respond both to these market variables and also to individual unemployment.

Various studies find that relative regional wages are lower in regions with higher relative regional unemployment (for example, Jackman and Savouri, 1991; Blackaby and Manning, 1992, 1990). This idea and supporting evidence receives the most thorough development in BlancMower and Oswald (1994). For the UK an elasticity of about 0.1 appears robust. Jackman and Savouri (1991) offer as

586 B. McCormick/European Economic Reuiew 41 (1997) S-589

their main conclusion the qualification that when the unemployment sensitivity of wages for manual and non-manual workers is compared, only wages for manual

workers appears sensitive to the level of regional unemployment, again with an elasticity of 0.1. On current unemployment trends, this hypothesis suggests that relative wages in the South East will decline.

The most comprehensive recent analysis of regional house prices is Muellbauer and Murphy (1994). They find that relative regional house prices are determined

by relative measures of (a) incomes in the region and contiguous regions, (b) financial liberalization with a regionally differentiated impact; (c) appropriately weighted interest rates, and (d) regional population relative to the housing stock. The income effect is large and a 10% income differential is predicted to create a

20% house price differential. How do regional unemployment, wages, and house prices influence migration? (i) Studies of the influence of relative regional unemployment on out-migration

using aggregate data provide evidence for a small conventional effect (for exam- ple, Gordon, 1985; Pissarides and McMaster, 1990; Jackman and Savouri, 1992). However, using individual level data and a list of control variables: (a) Pissarides and Wadsworth (1989) and Hughes and McCormick (1994) were unable to find a conventional positive effect for relative regional unemployment on out-migration; and (b) Hughes and McCormick (1994) also report negative findings in a model of destination choice. Vacancy rates have a marginal and inconsistent effect on

out-migration in the individual level studies listed above whereas in aggregated data a stronger effect prevails (for example, Jackman and Savouri, 1992). While Hughes and McCormick (1994) were unable to find conventional effects for vacancy rates on destination choice, Jackman and Savouri (1992) do find conven-

tional effects on in-flows using grouped data. (ii) Evidence from studies using individual data concerning the effects of

relative wages on out-migration and destination choice are more conventional and uniform: Pissarides and Wadsworth (1989), Hughes and McCormick (1994) and Salaheen (1995) all find significant conventional wage effects using individual level data. This has led to the suggestion that regional labour adjustment that is

based on unemployment push/pull is likely to be less successful than one based on relative regional wage flexibility. However, Jackman and Savouri’s (1992) study of aggregate data gives a less conventional and mixed picture of relative wage effects.

(iii) Recent work has examined whether the high house prices that follow a positive regional shock place an obstacle to entering a region that goes beyond the impact on the local price index. Why might this be? Persistently high regional house prices may create a financial barrier that might reflect either borrowing restrictions resulting from capital market imperfections or risk aversion towards a large single investment. Bover et al. (1989) also propose that not only do high trend house prices in the South East inhibit in-migration, but also that cyclical fluctuations in the relative price of housing in the South East influence net

B. McCormick/ European Economic Review 41 (1997) 581-589 587

migration and thereby exercise a significant role in explaining high UK real wage growth, despite high unemployment, between 1981-1987.

Blackaby and Manning (1992) find evidence for the effect of relative house prices on relative regional wages that are present even after controlling for relative cost of living, which is consistent with the Muellbauer-Murphy conjecture. In contrast, they find no evidence of a negative effect of house price differentials on relative unemployment rates, which would follow from the regional labour supply conjecture. Jackman and Savouri (19921, using grouped Health Service data, find evidence for the influence of relative regional house prices on net migration flows between pairs of regions and note that the effect is stronger for migration between con-contiguous regions. Using individual data Hughes and McCormick (1990, 1994) find only small house price effects on out-migration which are strongest for workers aged over 54 who migrate with a continuing employer. No effects of relative regional house prices upon destination choice were found.

(iv) All UK studies which examine the effect of individual unemployment one year prior to the survey data find this has a strong positive effect on out-migration over the intervening period, and roughly doubles the migration rate, ceteris paribus, for all socioeconomic groups (Pissarides and Wadsworth, 1989; Hughes and McCormick, 1994). Thus out-migration rates increase for the incremental unemployed created by an adverse regional shock. The sign of this effect appears to hold across data sets and countries.

Finally, we note that regional mobility is positively correlated with the business cycle (for example, Molho, 1984; Pissarides and Wadsworth, 1989; Jackman and Savouri, 1992) so that adjustment is likely to be moderated in a recession. Gordon (1995) argues that firm-sponsored migration is less sensitive to recession.

4. Overview

Between 1970 and 1990 employment growth in certain regions - the South West and East Anglia - was persistently above the national average by lo-15% per decade. These regions also experienced increasing relative wages - most markedly for non-manual workers. This wage pattern suggests that positive demand shocks (rather than supply) were the source of employment growth in these regions and that resulting job opportunities in these regions prompted persistent in-migration. In regions with negative employment growth in both decades 1970-80 and 1980-90 (Scotland, North, North West, Yorkshire, West Midlands) adverse demand shocks have prompted systematic net migration to the growing regions, but only by non-manual workers. The chief determinants of this migratory adjustment process appear to be, vacancies in the growing region, changes in relative wages, and higher migration rates for the (small) incremental number of unemployed that result from an adverse shock. Rising house prices in the relatively growing regions influence in-migration through the real wage effect

588 B. McCormick/European Economic Review 41(1997) 581-589

and may also encourage older residents to leave the region. The manuaZ labour market, in contrast, is spatially inflexible. There are low levels of gross migration, and little evidence that adverse demand shocks stimulate migration unless relative wage rates change. Neither migration nor significant fluctuations in relative wages play a significant role in eliminating rising manual unemployment in contracting regions. Instead there is a tendency for labour force participation rates to decline by greater amounts in the contracting regions, Evans and McCormick (19941, which together with out-migration by non-manuals, has enabled overall regional unemployment differentials to be largely maintained, but with a higher share of manual workers, following an adverse shock. Decressin and Fatas (1995) show that in Europe generally, region-specific shocks are largely absorbed by changes in participation whilst in the US inter-regional migration has been shown to play a central role, Blanchard and Katz (1992).

The modest tendency for trend regional unemployment rates to converge is not yet understood, unlike the new patterns of regional unemployment cyclicity which appear to follow from changes in the relative cyclicity of demand across UK regions. In neither case would the new developments appear to be well explained by measures which might have changed mobility patterns in a novel way.

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