A report prepared by researchers at Public and Corporate Economic Consultants on behalf of the Local Government Association projects the economic downturn could lead to a decline in employment across the region of 180,000. This was widely publicised in The Birmingham Post.
The Observatory undertakes a significant amount of economic research and so it is important that the method by which the headline figure, 180,000 is understood. This short posting is intended to explain how this headline projection was reached.
The report estimates sectoral performance based on previous recessions and then calculates regional ‘vulnerability’ by calculating regions’ shares of high, medium and low risk sectors.
Using a method called Shift Share the researchers calculate preliminary projections of potential employment losses based on national and sectoral (structural) responses. These preliminary estimates suggest employment would fall by 185,000 between 2008 and 2010.
Using the same method the researchers then sought to ‘explain’ the performance of regions in the last recession (1990 to 1992). In this period an estimated 184,000 jobs were lost in the West Midlands. The report’s authors calculated that wider national economic conditions explained 150,000 of this total while sectoral mix could only explain a further 24,000. The remaining 10,000 remained unexplained. What explains this difference?
Using a range of indicators, including population densities, business formation rates, and unemployment levels at the time the researchers sought to explain the differential. However, the only significant explanatory variable identified in explaining the differential was a positive link between employment performances in the two years prior to the 90-92 recession. In the case of the West Midlands recent performance in the two years prior to the 90-92 recession actually suggested employment should have been 8,000 more than it actually was.
The remaining part of the differential is then estimated to be explained by local factors. However, comparing the West Midlands performance in the recession in 1979 and the 1990 – 1992 highlighted a difference in local impacts between the two periods. In 1979 – 1982 employment in the region was higher than expected taking account al the factors above; however, in 1990 – 1992 this had been reversed and employment was below what would have been predicted. Given the difference in direction between these two period estimates, the regional local effect was set to zero.
The final stage of the analysis was to refine the preliminary estimates to take account of the unexplained differential identified in analysis of the 1990 – 1992. This was applied to calculate a revised vulnerability index.
In the case of the West Midlands:
|Projected change in employment 2008 – 2010|
|National||Structural (sector)||Recent (last two years)||Local||Total jobs at risk|