The size of labour markets and productivity

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www.snf.no

Et selskap i NHH miljøet

September 10, 2013 WEI-workshop in Molde

Labour market enlargements and productivty

When can WEI be expected, and how large? Per Heum

The size of labour markets and productivity

• From theory there are good reasons to expect that productivity should tend to increase with the size of labour markets

• Simple observations seem to support this relationship, at least when wages are used as a proxy for productivity

• Wages are higher in Oslo than in the rest of Norway, and they are generally higher in Bergen, Stavanger and Trondheim than in most of Norway

• So is also the case when mapping the average wage in all municipalities in Southern Norway

• Made a small correction for those who work in the oil sector as wages do not reflect productivity in industries where huge resource rents are harvested

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Employment and average wage in

municipalities, 2009

(Southern Norway)

10.09.2013 Fornavn Etternavn, navn@nhh.no 3

Labour market enlargements and productivity

• It is far more complicated to estimate the productivity effects that should be expected if local labour markets are enlarged

• Present an approach which is quite simple • Data are easily available

• Straight forward to conclude when labour market enlargements, and in turn, productivity gains of some magnitude may be expected, and when they are not

• The scientific basis for the approach need to be developed further • Present some critical issues to be discussed at the end

• Grateful for comments and suggestions

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Local and regional labour markets

• The working force in all geographic locations is part of a labour market

– How can we define the size of the labour market they belong to?

• The basis for our analysis is that the local unit is a municipality: 342 municipalities in Southern Norway in 2009

• These municipalities differ greatly in size

– In terms of inhabitants: from 218 (Utsira) to 613,285 (Oslo) – In terms of geographic area: from 6 square-kilometers (Kvitsøy) to

3,180 square-kilometers (Rendalen)

• How can we decide when the labour market of different

municpalities are integrated in larger, regional labour markets, and when the labour market is more or less limited by the boarders of the municipality?

Integrated or not?

• Data are easily available for each municipality in Norway

– Average wage – Number of workers

– Time it takes to commute to neighbouring municipalities

– Number of people who commute to each neighbouring municipality

• Defining regional labour markets

– The major defining criteria is time it takes to commute. A travel distance of 45 minutes or less has been considered acceptable for working in another municipality and to allow for integration – This is then adjusted according to

• The number of people who actually commute: Should be higher in an integrated area than in non-integrated areas

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Regional labour markets in Southern Norway

• Of the 342 municipalities in Southern Norway there are 77 which meet the criteria of belonging to an integrated regional labour

• These form 11 labour market regions in Southern Norway

–Five quite large municipalities are excluded from the analysis because they don’t fit into the way integration and non-integration is defined

• In all the 11 labour market regions

– The average wage is approximately of the same magnitude in all municipalities within a regional labour market (almost) independent of municipality size

– The average wage in non-integrated bordering municipalities of the defined regional labour market

• Is lower than in the regional labour market they are adjacent to • Tend to increase with municipality size

Labour markets in Trøndelag

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Monocentric and chained integration

• These empirical findings comply with what theory suggest: labour market size matters when it comes to productivity.

• Size matters when comparing productivity in

– municipalities which surround a regional labour market – the 11 regional labour markets

• The 11 regional labour markets divert somewhat from theory as they are not all located around a centre. There are two types

– Monocentric, i.e. a city is the centre of the region and neighbouring municipalities are integrated within 45 minutes travel distance to the centre

– Chained; i.e. the labour market around smaller cities with a travel distance of less than 45 minutes between the cities pairwise, will chain labour markets so that integration occurs across geographic areas where it takes much more than 45 minutes to travel from one end of the labour market to the other

90 km, 75 minutes

Vestfold and Telemark

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Estimating the impact of regional labour

market size on productivity

The approach applied on large infrastructure

projects

• When considering the productivity impact of large infrastructure projects, we need to justify that the project causes an enlargement of previous labour markets

• If the infrastructure project reduces the time it takes to commute between two municipalities to 45 minutes or less, we may expect labour market enlargements to take place

• The «new» productivity level that can be reached, is calculated by applying the estimated productivity elasticity on how much larger previous separate labour markets are expected to become

• It takes time to realize the «new» productivity level. It may imply changes in settlement and industries, which gradually will evolve. Thus, the productivity gains are achieved over time, and it probably takes decades to be fully realized

• Society gains from the «new» productivity level for the whole working population in the labour market in question. This easily adds up to large figures when labour markets are large.

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Applied on E39

• The approach indicates that it is possible to construct road infrastructure which lead to a chained integration of the current regional labour markets around Stavanger, Haugesund and Bergen

– If so, the regional labour market concerning Stavanger and Bergen will be twice the current size for both city regions, and the regional labour market concerning Haugesund will be more than 6 times the current size of the Haugesund region

• Thus, the approach suggest that wider economic impacts of large magnitude may be expected: Substantial enlargements should have significant productivity impact, and in particular because it concerns many people

• The same approach clearly suggests that wider economic impacts of this kind cannot be expected from investing in a ferry free crossing of Sognefjorden

– Very small settlements over large travelling distances

How to take the approach further

• The approach clarifies in a simple way whether wider economic impacts in terms of productivity expansion may be expected or not • The approach can still be improved

– How to adjust wages for influence of resource rents?

– How to model agglomeration effects within an integrated labour market region?

• Are they the same within a region, or do they diminish with distance to a regional centre?

• To what extent are they industry dependent?

• Much more detailed work is needed to estimate how large productivity gains that can be expected

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Principal questions to be discussed

• Comments are particularly welcome on two principal issues

1. Theory seems to argue that there are agglomeration effects (productivity increase) in contexts that resemble the enlargement of labour markets with monocentric integration. Can the same mechanisms be expected to be at work in what we have described as regional labour markets that are chained?

2. If it takes decades for the expected productivity increase to be fully realized, what is the relevant reference alternative for comparing the benefits to society in a proper cost-benefit analysis?

- The population in urban areas have grown relatively more than the national population growth for the last 150 years

- The «middle» scenario for population growth predicts continuous urbanization at least until 2100

* In the «middle» scenario the population in the labour market regions of Stavanger, Haugesund and Stavanger is expected to grow between 30% (Stavanger) and 35% (Bergen) until 2040