ESPON Economic Crises: Resilience of Regions This work was supported by the European Spatial Planning and Observation Network grant 2013/1/25

17/06/2016

The Resilience of UK Regional Employment Cycles

Marianne Sensier, University of Manchester E-mail: marianne.sensier@manchester.ac.uk

http://www.cf.ac.uk/cplan/

research/economic-crisis

Business cycles are of interest to policy makers, businesses and, at a regional level, the Local Enterprise Partnerships and councils.

We assess the turning points in the quarterly UK aggregate series (GDP, employment and unemployment) and UK region’s employment.

We analyse synchronicity of regional employment cycles and test for regional clusters.

We assess the regional employment series for their resilience to the financial crisis.

2

Summary

Resilience of regions

Description of Business Cycle Dating Algorithm

National business cycle dates

Regional cycles and synchronisation

Clustering of regions

Conclusions

3

Overview

Country level analysis: Burns and Mitchell (1946, NBER); Bry and Boschan (1971); Harding and Pagan (2002, JME) + (2002, JEDC) + (2006, JoE); Harding (2012).

Regional studies: UK in Martin (2012, JEG); US in Hamilton and Owyang (2012, REStat); NZ in Hall and McDermott (2007, Papers in Regional Science); Spanish in Gadea, Loscos and Montanes (2010 working paper).

4

Business Cycle Dating papers

Four dimensions, Martin (2012):

1. Resistance - the sensitivity of a region compared to the nation during the recession.

2. The speed and extent of Recovery from the recession.

3. Structural Re-orientation, what implications this has for the region’s jobs, output and income.

4. The degree of Renewal a region will undergo following the shock.

5

Economic Resilience to a Shock

We apply the classical business cycle dating algorithm of Artis, Marcellino and Proietti (2004, OBES), nonparametric Markov Chain.

The economy is in one of two mutually exclusive states: expansion or recession. From the expansion continuation (ECt) we can make a transition to a peak (Pt) or continue the expansion, but not vice versa as only is allowed.

Analogously, from recession continuation (RCt) we can make a transition to the trough (Tt) but move from with the probability of 1.

6

Business Cycle Dating Algorithm

1 tt RCP

1 tt ECT

We impose a minimum phase duration and enforce the alternation of peaks and troughs, distinguish turning points between two phases:

We impose a minimum phase duration of 2 quarters from peak to trough and a minimum length of the entire business cycle (from peak to peak) to be 5 quarters.

7

Business Cycle Dating Rules

t

t

t

t

t

tT

RCR

P

ECE

The synchronisation of cycles is measured with the concordance index which calculates the percentage of time that two regions (i and j) spend in the same phase of the cycle. St is the business cycle binary indicator variable that takes the value of 1 when the region is in expansion and 0 when in recession.

Mean-corrected concordance index:

8

Synchronisation: Concordance Index

T

t

jtitjtitij SSSST

I1

111

T

t

jtjtititij SSSST

I1

* 12

The aggregate series cover the sample 1971q1 to 2014q4 and for UK employment (ONS: MGRZ) and include all the workforce over the age of 16.

We also date turning points in output (Gross Domestic Product , (chained volume measure ONS: ABMI) and unemployment (ONS: MGSC).

The employment data is from the Labour Force Survey and commences in 1992 Quarter 2 for 9 English Regions (NE, NW, YH, EM, WM, ET, SE, SW and LN), Wales, Scotland, and Northern Ireland.

All are seasonally adjusted.

9

UK Aggregate & Regional Series

0

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

1973.2 1974.3 1979.2 1990.2 2008.1

1974.1 1975.3 1981.1 1991.3 2009.2

UK GDP (£millions)

428514

163732

28464

2008/09 recession:

-6% GDP loss

22 quarters to

recover in 2013q3

1990/91 recession:

-2.2% GDP loss

11 quarters to

recover in 1993q1

0

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

1974.3 1979.4 1990.2 2008.2

1971.4 1976.3 1983.2 1993.1 2010.1

UK Employment (thousands)

23647

2653

308962008/10 recession:

-2.4% emp loss

17 quarters to

recover in 2012q3

1990/3 recession:

-6.1% emp loss

34 quarters to

recover in 1998q4

0

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

1972.1 1977.4 1984.2 1986.3 1993.1 2002.3 2007.1 2010.1 2011.4

1973.4 1979.2 1985.4 1990.2 2001.2 2004.3 2007.4 2010.3

UK Unemployment (thousands)

888

3265

201

1990/3 recession:

50% unem. gain

29 quarters to

recover in 1997q3

2008/10 recession:

57% unem. gain

not yet recovered

67% unem. gain

double dip to 2011

ECRI GDP Emp. Unem.

Peak 2008m5 2008q1 2008q2 2007q4

Trough 2010m1 2009q2 2010q1 2010q1

Duration 7 q 5 q 7 q 9 q

Change P

to T

-6.04% -2.39% 57%

Recovery

Date

2013q3 2012q3 Not yet

13

2008 Recession: UK Aggregate Series

ECRI - Economic Cycle Research Institute

Web-site: www.businesscycle.com

GDP Emp. Unem.

Exp. Prob. 0.86 0.75 0.48

Rec. Prob. 0.14 0.25 0.52

Exp. Duration 30.4 q 33 q 11.5 q

Rec. Duration 4.8 q 8.8 q 9.3 q

E. Amplitude 64,255 2,698.5 -542.6

R. Amplitude -11,298 -902.2 580.3

E. Steepness 2113.6 81.8 -47.2

R. Steepness -2353.8 -102.5 62.2

14

UK Aggregate Series: Summary Stats

GDP Emp. Unem.

GDP 1 0.14** -0.12**

Employment 0.82 1 -0.26**

Unemployment 0.36 0.23 1

15

UK Aggregate Series: Synchronisation

Notes: concordance index (bottom left), mean-

corrected concordance index (top right), test t-statistics

significant at 5% level (**).

Sample: 1971q1-2014q4.

The summary statistics over 1992q1-2014q4 show:

Highest expansion probability (0.82): South East

Highest recession probability (0.4): North East

Longest expansion duration (15q): South East

Longest recession phase duration (5.8q): Wales

Steepest expansion (23,170 per quarter): London

Steepest recession (-16,590 per q): South East

Steeper recessions than expansions in NW, YH, WM, SE, SC and UK.

16

Region employment cycle statistics

The concordance index over 1992q1-2014q4 show:

The South West is significantly synchronised with 6 other regions: NE, NW, WM, SE, WL & SC. Yorkshire & Humberside with none.

The highest concordance index is between the South West and North West which are in the same business cycle phase for 84% of the time, the mean corrected index for this is 0.25.

The regions which are not synchronised with UK employment are London, the East Midlands and the North East.

17

Region employment synchronisation

0

1990 1995 2000 2005 2010 2015

1993.2 1997.3 2000.2 2001.4 2007.4 2010.3 2012.3

1992.4 1994.4 1999.2 2001.1 2003.1 2009.2 2011.3 2013.1

North East Employment

1185

109

1017

2008/09 recession:

-5.56% emp loss

28 quarters to

recover in 2014q4

0

1990 1995 2000 2005 2010 2015

1992.3 1995.4 2000.4 2006.1 2008.1 2010.2

1993.1 1996.4 2001.2 2007.1 2009.2 2010.4

Yorkshire & Humberside Employment

2138

230

2517

2008/10 recession:

-4% emp. loss

23 quarters to

recover in 2013q4

0

1990 1995 2000 2005 2010 2015

1992.4 1997.2 1999.4 2001.2 2003.3 2008.4 2011.1

1993.4 1997.4 2000.2 2003.1 2004.3 2009.2 2011.3

London Employment

4302

352

2946

2008/09 recession:

-2.37% emp loss

7 quarters to

recover in 2010q3

NI NE SC WL

Peak 2008q2 2007q4 2008q2 2008q2

Trough 2009q2 2009q2 2010q1 2010q1

Duration 4 q 6 q 7 q 7 q

Change P

to T

-5.87% -5.56% -4.5% -4.19%

Recovery 2011q2 2014q4 2013q3 2013q2

Length to R 12 28 21 20

21

2008 Recession: Regions over 4% fall

Note: bold font indicates region is leading UK employment peak

(2008q2) and italics indicate lagging national (2010q1).

YH WM EM SW

Peak 2008q1 2008q1 2008q1 2007q4

Trough 2010q4 2009q1 2010q3 2010q1

Duration 11 q 4 q 10 q 9 q

Change P

to T

-3.94% -3.49% -3.28% -3.19%

Recovery 2013q4 2012q3 2013q4 2014q1

Length to R 23 18 23 25

22

2008 Recession: Regions less 4% falls

ET SE NW LN

Peak 2008q4 2008q2 2007q4 2008q4

Trough 2010q1 2009q3 2009q4 2009q2

Duration 5 q 5 q 8 q 2 q

Change P

to T

-2.65% -2.5% -2.48% -2.37%

Recovery 2011q1 2013q2 2014q1 2010q3

Length to R 9 20 25 7

23

2008 Recession: Regions less 3% falls

Cluster 2

In-phase Out-of-phase

Cluster 1 In-phase

Out-of-

phase

24

McNemar Test for Clusters

The non-parametric McNemar test analyses the

frequency of synchronisation for clusters of regions.

The McNemar test statistic (with a continuity correction

suggested in Sheshkin, 2002) is distributed as chi-

squared test with one degree of freedom:

11, NN inin

12, NN outin

21, NN inout

22, NN outout

2112

2

211221

1NN

NN

Grouping 1 (N12= 18 > N21=7 )

1992q1-

2014q4

“South”: London, South East, Eastern, East

Midlands, South West and West Midlands

4.0

(0.05)

“North”: Wales, Scotland, North West,

North East, Yorkshire and Humberside and

Northern Ireland

Grouping 2 (N12=13 < N21=22 )

“East”: London, South East, Eastern, North

East, East Midlands and Yorkshire and

Humberside

1.83

(0.18)

“West”: Wales, West Midlands, North West,

South West, Scotland and Northern Ireland

25

McNemar Test: Regional Clusters

Region name share code

North East 3.9% C

North West 11% D

Yorks. & H. 8.3% E

East Midlands 7.3% F

West Midlands 8.7% G

Eastern 9.6% H

London 12.6% I

South East 14.4% J

South West 8.6% K

Wales 4.6% L

Scotland 8.6% M

N. Ireland 2.6% N

UK Regional Map and Employment Shares

We construct a weighted diffusion index across all regions, as follows:

The weights (wit) are calculated as the proportion of the regions employment of aggregate UK employment. We also calculate Northern (39% employment share) and Southern (61% share) diffusion indices based on our region clusters.

27

Common Cycle: Diffusion Index

,1

it

N

i

itt SwD

.1,,.....,1 i

itwTt

28

Diffusion Index

0

0.2

0.4

0.6

0.8

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Q3

Diffusion North South

In 2008 UK GDP had a more severe recession than Employment and took longer to recover its peak level. Employment was more resilient than GDP and more resilient recovering from this crisis than it was recovering from the 1990s recession.

Unemployment has had a greater number of cycles and is yet to recover its 2007 low. In the 1990s recession unemployment increased by 50% and this time it has proved less resilient with 57% gain to 2010 but 67% gain to the double dip in 2011, 28 quarters later it has still not recovered the 2007 level.

29

Conclusions: aggregate data

The most resilient region in the 2008 recession has been London with Northern Ireland the least resilient and the North East the least resilient region in England.

How did London “Get away with it”? Overman (2011) suggests the larger proportion of middle income earners and jobs in the service industry helped London recover quicker. London being a larger region with a more diverse labour market.

30

Conclusions: regional data