The impact of employment specialisation on regional labour market outcomes in Australia.

Author:Hicks, John
Position:Contributed Article - Report


This article examines the industry composition of employment across Statistical Divisions in Australia utilising census data from 2001 and 2006. We find some evidence to support the hypothesis that peripheral regions tend to have a higher level of employment specialisation than metropolitan centres, but there is little indication that employment specialisation, in general, grew over the period. From a policy perspective, we provide support for the findings of previous Australian researchers that higher levels of employment specialisation are associated with better labour market outcomes in a region, and that when policymakers assess different regional-development policies, they should give some consideration as to whether or not the implementation of their preferred policy will have an impact upon employment specialisation in the particular region.

  1. Introduction

    Changing industry structure and an associated change in the industry composition of employment are ongoing features of all national economies. Commonly, these changes have been a decline in the importance of and employment levels in primary and secondary industries and a rapid growth in tertiary industries (see for example Robson (2006) and Garnet and Lewis (2007)). However, within each industry sector the experience of individual industries associated with that sector may be very different. For example in the Australian primary sector, drought may induce a decline in agriculture (Horridge et al., 2005), while external factors may stimulate mining (Connolly and Orsmond 2011). Further, across regions within national borders the nature of the changes taking place will display similar variability (Robson 2006).

    Theoretical analysis (Krugman 1991; 1993; 2009; 2010) has attempted to explain both inter-temporal and geographic shifts in industrial-employment structures and the tendency towards either increasing or decreasing regional specialisation in employment. Government policy is capable of having an impact on the industrial structure, and consequently on the degree of employment specialisation across regions within an economy (Wren and Taylor 2009). Beer and Clower (2009) suggested that the desire to pursue policy intervention to change a region's industry structure is likely to evoke the question of whether or not the change generated is beneficial for that regional economy.

    In the Australian context, this article explores the pattern of regional employment specialisation, how it has changed over a limited time span (between the 2001 and 2006 censuses), and whether--when formulating regional employment policy--the government should take into consideration the impact that their proposed policy would have on a region's employment specialisation. The study utilises a new dataset derived from the 2001 and 2006 Australian censuses. These data provide for a sub-state classification of regions and a detailed classification of employment by industry. Section 2 surveys previous research in Australia and internationally; it reviews the literature that deals with the theoretical underpinnings of the analysis. Section 3 considers issues of research method, including the definition of a region, selection of measures of employment specialisation, and description of the data. The research findings a re presented in Section 4 and are discussed in Section 5, after which some policy conclusions are drawn.

  2. Literature Review

    Empirical analysis of regional employment specialisation and its impact on regional economies is the focus of many international studies (for example Lilien 1982; Wren and Taylor 1999; Marelli 2004; Shearmur and Polese 2005; Suedekum 2006; Robson 2006; Belke and Heine 2006; Robson 2009). There is also a growing, but still relatively limited amount of literature that considers regional employment specialisation in an Australian context (Bradley and Gans 1998; Beer and Clower 2009; Stimson et al. 2009; Dixon and Freebairn 2009).

    International research findings have been somewhat inconsistent. Lilien (1982) argued for regional policy intervention to offset identified disadvantages. Wren and Taylor (1999) found that all UK regions had increased in terms of their employment specialisation but that partly as the result of successful regional policy, the regions tended to converge towards the national employment pattern. Marelli (2004) found in his study of 145 European regions that specialisation had been decreasing, although he found evidence that increased specialisation had a positive impact on regional growth. Robson (2006) confirmed the increase in employment specialisation in UK regions, but found little evidence of convergence. Robson (2009) found a small but statistically significant relationship between an improved functioning of the regional labour market and increased regional employment specialisation. On the basis of their evidence, Shearmur and Polese (2005) concluded that diversification polices to enhance regional growth in Canada were difficult to justify However, Suedekum (2006) considered that his results based on German data supported diversification policies, despite not finding evidence of increasing employment specialisation in German regions.

    Bradley and Gans (1998) attempted to explain the growth of Australian cities in terms of population and labour force growth. They included as one of their explanatory variables a measure of the industry specialisation of each of their selected cities, namely a modified Herfindahl index applied to city data segmented into 12 employment groups (Bradley and Gans 1998, p. 270). This broad classification of data was all that was available then. Their results indicated a negative relationship between growth and specialisation.

    With a similar measure of employment specialisation, Beer and Clower (2009) utilised 2001 census data for 76 Australian cities (with populations greater than 10,000). While they found no relationship between labour force growth and their end-period employment specialisation measure (p. 383), they found a significant relationship between their measure of the change in employment specialisation and labour force growth (p.385).Their analysis suggests that the explanation for the difference between the findings of the two articles may be the substantially enhanced competitive nature of the prevailing economic environment at the time of the latter study. From the 1970s, with substantial reductions in tariff barriers, and moving through the floating of the Australian dollar in the 1980s and the microeconomic reforms of the 1990s, the Australian economy became more competitive globally and 'the economies of regional cities have reflected this transformation and those cities that have moved to greater levels of specialisation in their economies appear to have had the most certain economic growth' (Beer and Clower 2009, p. 386).

    Stimson et al. (2009) used data from the 1991 and 2001 censuses to construct location quotients for mainland Local Government Areas as an index of employment specialisation over three employment categories. Based on these data they found limited support for a link between employment specialisation in a region, and in regional growth.

    Finally, Dixon and Freebairn (2009) looked at regional differences in the composition of employment across 52 industry groups in regional Australia. They found that their measure of specialisation--the Coefficient of Regional Specialisation--indicated that the industrial composition of Australian states had tended to become less specialised over time. They attributed this to the tariff reductions which occurred throughout the period of their study.

    In summary, past research based on different measures of employment specialisation produced evidence of constant, decreasing, and increasing levels of employment specialisation across regions. Within Australia, work undertaken at the city and Local Government Area levels with a relatively small number of industry groups returned findings of increasing specialisation; research at the state level, with a much larger number of industry categories, returned findings of falling specialisation. Evidence relating to the hypothesis that increasing regional employment specialisation will result in enhanced economic outcomes for a region has been found in some studies but not in others.

    The Krugman hypothesis

    The 'core-periphery' model, established in Krugman (1991; 1993) and revisited in Krugman (2009), is said to be driven by the choices open to both firms and individuals (RSAS 2008). Firms are attracted to the larger market by the potential economies of scale offered by the larger market and the likely saving in transport costs. On the other hand, individuals have an incentive to move to the region offering higher real wages and a greater variety of goods and services. The result of this is that the larger, more diverse core tends to grow and increase in diversity while regions at the periphery tend to become more specialised.

    Increased specialisation at the periphery results from the interplay of the forces considered important in the Krugman model. Internal economies of scale accrue to the firm as it grows in size in one location and are associated with market size. External economies of scale, on the other hand, result from the organisation of the industry into agglomerations of firms that are mutually beneficial. When transport costs are high, firms remaining or establishing and growing in the periphery, will generally be those for which internal economies of scale are less important than the location of inputs (especially raw materials) and the presence of external economies. If transport costs fall, some firms in the periphery will relocate close to the large local market in order to take advantage of internal economies. However, as transport costs continue to decline, access to the market becomes less important and rising factor costs motivate firms to return to...

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