RDP 2002-04: Labour Market Adjustment in Regional Australia 1. Introduction

Over the past two decades in Australia, marked differences in the economic conditions of regions have emerged. This so-called ‘regional divide’ has occupied a prominent place in public discussion, and motivated a number of reports on the economic circumstances of regional Australia (ABARE 2001; Salt 2001; Productivity Commission 1999).^[1] While a good deal is now known about the spatial dimensions of economic performance – particularly labour market outcomes – less is known about the reasons for such variation. And yet, in addition to their distributional effects, regional variations in economic outcomes can have efficiency implications. In an efficient national labour market, for example, a persistent change in local conditions will be reflected in patterns of inter-regional migration.^[2] If this does not occur, or occurs only slowly, negative shocks may have prolonged effects, and the economy's growth potential might be impeded.

Given that significant disparities in regional labour market outcomes exist, why do they occur? This question is difficult to answer because a myriad of factors can influence a local labour market, including region-specific shocks as well as different regional responses to broader shocks. Consequently, researchers have tended to advance possible reasons for regional variations in labour market outcomes, with relatively few studies formally testing the role of specific factors. In an attempt to better understand the reasons for regional disparities in labour market outcomes, the strategy adopted in this paper is to identify the characteristics of regions, and then observe those characteristics that tend to be associated with particular outcomes. This permits us to assign a probability to a characteristic being present for regions that experience employment expansion or contraction, and for regions that experience inflows or outflows of migrants. In this way, we seek to identify the key conditions that are associated with regional disparities in labour market performance.

The paper is organised as follows. First, we present a brief review of the recent literature on regional economic conditions in Australia and define what we mean by a ‘region’. Second, we illustrate some of the stylised facts about regional labour markets between the census years of 1986 and 1996. We show that employment growth was highly dispersed during this period. We also show that regional employment growth was often not inversely related to changes in unemployment rates, as tends to be the case in national and state economies, because of significant variations in the strength of regional migration. Third, using a new and comprehensive regional database that draws on data from both the census and government departments, we identify the economic characteristics of regions. We then use logit models to establish the significant characteristics of those regions that have experienced large changes in employment and large migration flows. Finally, the key drivers of regional disparities in performance are assessed.

Footnotes

Furthermore, there has been privately commissioned research that is available to subscribers to the National Institute of Economic and Industry Research (NIEIR 1999, 2001). [1]

Or relative wage adjustment. However, in practice, the scope for relative wage adjustment is often constrained by wage-setting institutions. [2]