Reserve Bank paper finds unemployment in one region can affect another

Studying changes in job levels in the Auckland and Waikato regions could provide a more accurate indicator of where the country’s labour market is heading, according to a new Reserve Bank paper.

The Analytical Note Regional Labour Market Spillovers examined regional labour markets and how unemployment in one region could spill over and influence joblessness in other regions.

“By doing this we can identify which regions have the greatest or smallest impact on other regions and identify which ones give us an early heads up about where national unemployment is heading,” Reserve Bank analyst and the paper’s author Cameron Haworth said.

The report found rising unemployment in Auckland and Waikato had the most influence on unemployment around New Zealand. In contrast, rising unemployment in the Upper South Island, Southland, and Taranaki generated few spillovers into other regions.

“The forecasts from the model are significantly more accurate than benchmark statistical models, and are particularly accurate over the past year,” Mr Haworth said.

“Our results suggest that during the COVID-19 recovery, rising unemployment in the Upper North Island may have a greater impact on the national labour market than unemployment in the South Island.

However, Mr Haworth cautioned COVID-19 is making forecasting difficult.

“COVID-19 may change the structure of these relationships. By tracking how they change in the early stages of the recovery, we can adapt the model to help forecast unemployment when conditions stabilise.”

“The insight we gain from this approach will help us better set monetary policy to achieve our mandate in supporting employment in New Zealand,” Mr Haworth said.

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