Modelling Regional Labour Market Adjustment in New Zealand

This report was produced for the New Zealand Treasury Working Paper 02/01.

This paper adopts a vector auto-regressive (VAR) approach to analyse the labour market adjustment mechanisms for 12 New Zealand regions over the period 1985 to 2001. It examines the effects of a region-specific shock to employment on itself, the unemployment rate, the participation rate, and the wage rate. The role of migration as a channel of regional labour market adjustment is also inferred.

We find that adjustment occurs predominantly through inter-regional migration although the unemployment and participation rates also play a role. Wages, on the other hand, account for very little adjustment.

The importance of inter-regional migration in New Zealand matches the results found in Sweden, but stands in contrast to the picture in many European countries. Migration appears to be a more dominant adjustment channel compared to the US and Australian cases. However, this has to be placed into context - New Zealand regions are much smaller in terms of population size.