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The Relationship Between Regional and National Unemployment

  • David Shepherd
  • Robert Dixon

An important issue in the analysis of regional unemployment is whether movements in regional unemployment rates reflect the impact of region-specific shocks or shocks affecting the entire economy. Previous studies have examined this problem by considering how the regional rates move in relation to the national unemployment rate. However, it has to be remembered that the national rate is merely a weighted average of the regional rates. In this paper we show that misleading correlation or regression results are likely to be generated by such models and that the problem can best be avoided by utilizing available information about the interactions between the regional unemployment rates directly rather than their relationship to the national rate. The theoretical arguments are illustrated with simulation experiments and as a practical example we consider the relationship between regional and national unemployment in Australia. Une question-cle quant a l'analyse du chomage regional c'est de savoir si, oui ou non, la variation du taux de chomage regional reflete l'impact des chocs specifiques a une region ou bien des chocs qui touchent une economie dans son ensemble. Des etudes anterieures ont examinece probleme en considerant comment les taux de chomage regionaux varient par rapport au taux de chomage national. Il est a noter que le taux national ne constitue qu'une moyenne ponderee des taux regionaux. Cet article cherche a demontrer que de tels modeles risquent d'engendrer des correlations ou des regressions trompeuses et que l'emploi des renseignements disponibles sur l'interaction directe des taux de chomage plutot que leur rapport au taux national permet d'eviter ce probleme. Les arguments theoriques sont illustrees a partir des simulations et, a titre d'etude de cas, on considere le rapport entre le chomage regional et le chomage national en Australie. Bei der Analyse regionaler Erwerbslosigkeit erhebt sich die wichtige Frage, ob Verschiebungen der Erwerbslosigkeit auf regionaler Ebene die Auswirkung regionalspezifischer oder die die Gesamtwirtschaft betreffenden Erschutterungen widerspiegeln. Fruhere Studien haben dieses Problen untersucht, indem sie Vergleiche zwischen der Verschiebung der Raten auf Regionalebene im Verhaltnis zur Erwerbslosigkeit auf Landesebene anstellten. Man muss jedoch bedenken, dass die Landesrate nur einen hoher bewerteten Durchschnitt der Regionalraten darstellt. Die Autoren zeigen in diesem Aufsatz, dass solche Modelle durchaus irrefuhrende Korrelationen oder Regressionsresultate ergeben konnen, und dass dies Problem am ehesten vermieden wird, wenn verfugbare Daten bezuglich den Wechselwirkungen zwischen regionalen Erwerbslosigkeitsraten direkt in Anwendung gebracht werden, statt ihre Beziehung zur Landesrate einzusetzen. Die theoretischen Argumente werden mit Simulationsexperimenten illustriert, und als praktisches Beispiel fuhren die Autoren die Beziehung zwischen Erwerbslosigkeit auf regionaler und auf Landesebene in Australien an.

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Article provided by Taylor & Francis Journals in its journal Regional Studies.

Volume (Year): 36 (2002)
Issue (Month): 5 ()
Pages: 469-480

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Handle: RePEc:taf:regstd:v:36:y:2002:i:5:p:469-480
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  1. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December.
  2. Ron Martin, 1997. "Regional Unemployment Disparities and their Dynamics," Regional Studies, Taylor & Francis Journals, vol. 31(3), pages 237-252.
  3. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, March.
  4. Grosby, M. & Olekalns, N., 1996. "Inflation, Unemployment and the NAIRU in Australia," Papers 96/31, New South Wales - School of Economics.
  5. A. P. Thirlwall, 1966. "Regional Unemployment As A Cyclical Phenomenon1," Scottish Journal of Political Economy, Scottish Economic Society, vol. 13(2), pages 205-219, 06.
  6. Dixon, R. & Shepherd, D., 2000. "Misleading Regressions with Constructed Variables," Department of Economics - Working Papers Series 754, The University of Melbourne.
  7. Dixon, R. & Shepherd, D., 2000. "Trends and Cycles in Australian State and Territory Unemployment Rates," Department of Economics - Working Papers Series 730, The University of Melbourne.
  8. Pesaran, M.H., 1992. "A Generalised R2 Criterion for Regression Models Estimated by the Instrumental Variable Method," Cambridge Working Papers in Economics 9220, Faculty of Economics, University of Cambridge.
  9. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  10. Cochrane, John H., 1991. "A critique of the application of unit root tests," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 275-284, April.
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  12. Groenewold, Nicolaas & Hagger, A J, 1998. "The Natural Unemployment Rate in Australia since the Seventies," The Economic Record, The Economic Society of Australia, vol. 74(224), pages 24-35, March.
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