Employment Dynamics in Regional Labour Markets: An Application of Gross Flows Analysis

Abstract

This paper uses gross flows data for regions to show how the chance of leaving employment varies from place to place within New Zealand and how this risk of leaving employment influences subsequent search behaviour. We define labour market risk as the failure to sustain a continuous income stream through employment. Estimates of employment risk are made by applying a linear logit model to selected transition probabilities estimated from a quarter to quarter gross flows matrix constructed from New Zealand Household Labour Force Survey returns for the 14 year period 1986to 1999. We show how the risk of employment separations increase as the size of regional labour markers declines and their demand for labour weakens and how the diminished opportunities for employment in the peripheral regions encourages active rather than passive searching among those who leave employment. In regions with relatively high labour demand leaving employment is more likely to be followed by withdrawal from the labour force. By contrast, labour leaving employment in the weaker, provincial, labour markets is more likely to be followed by active searching (and hence unemployment). The way in which employment risk modifies search behaviour across the country affects the unemployed rate, raising it in weak markets and lowering overstating it in strong markers both temporally and geographically.