1. The local labour market effects of decline in public sector employment
BIS Analyst Conference
24 November 2011
Frank Bowley
Thank you for coming, you’re just in time to settle an argument
Back in April, Mike and I started arguing about the likely impact of any public sector cuts across the country
Mike thinks that there will be places which will see a significant shock to the economy
I, like a proper supply-side economist, feel that where the public sector is a significant employer, it crowds out the private sector
So as the public sector contracts, the private sector should grow to pick up the spare workers
Since April, this question has had some political traction, so we have been able to spend some time gather evidence as opposed to wide speculation
So this presentation is based on work from a number of people: Heather Holt, James Beeson, Sarah Hamilton and Alistair Griffiths

2. OBR forecast highlights2
OBR forecast highlights
Year
Growth (%)
Output gap (%)
Employment level (m)
Unemploy
Rate (%)
Public
Private
2009/10
-4.9
-4.2
7.6
2010/11
1.3
-3.4
5.7
23.2
7.9
2011/12
1.7
-3.9
8.2
2012/13
2.5
-3.6
5.6
23.4
8.1
2013/14
2.9
-3.0
23.7
2014/15
-2.2
5.4
24.1
7.0
2015/16
2.8
-1.4
5.3
24.5
6.4
Source: OBR March 2011 forecast

3. Bank of England growth forecast
Source: Inflation Report – Nov 2011

4. Policy question
Based on OBR forecasts, the national impact of public sector cuts will be muted.
But,
Are there any places in England were the cuts will be significant?
Will the private sector be able to grow quick to absorb redundant public sector workers?
What areas are the most vulnerable?

5. Public sector data
Among the areas which show biggest differences: Whitehaven (Sellafield); Cambridge, Canterbury and Lancaster (universities)
Previously used ABI data with the sectors Public Administration and Defence; Education and Health
Private sector jobs in health and education included (e.g. universities)
Public Sector jobs in post and telecommunications excluded

6. Spatial unit of analysis6
Spatial unit of analysis
What is a local labour market?
An area where supply and demand of labour interact
But available data areas have problems
overlapping areas
commuting (supply and demand in different areas)
Proportion of population commuting in or out (2008)
Percentile
Commuting
10th
25th
50th
75th
90th
Local authorities
Out
15.8
40.7
61.9
80.4 In
21.3
42.3
64.4
82.8
Travel to work 5
21.7
38.7
56.9
8.6
25.4
42.9
68.8
Region
4.8
5.8
8.8
12.8 18
3.3
6.5
7.7
10.4
10.6

7. Public sector distribution7
Public sector distribution
Source: BIS calculations from ABI, LFS and DWP data 7

8. Public sector distribution
Spearman rank correlation of public sector dependency metric
Jobs
Workforce
Population
ρ = 0.998
ρ = 0.818
ρ = 0.827
Source: BIS calculations on ABI and LFS data

9. Public Sector Proportions by English TtWA, 2008

10. Public sector size & private sector growth10
Public sector size & private sector growth
Source: BIS calculations of ABI data

11. Public sector crowding out ?
One key issue is whether changes in public sector employment affect the private sector, as:
supply-side – extra supply from public sector may allow a constrained private sector to grow.
demand-side – less public sector employment reduces aggregate demand, reducing private sector employment.

12. Public sector pay premium – high skill

13. Public sector pay premium – medium skill

14. Public sector pay premium – low skill

15. Searching for crowding out - strategy
At the most basic, change in one sector may cause a change in the other:
negative correlation denotes supply-side effects
positive correlation denotes demand-side effects
But public sector may not be randomly distributed
Government may put public sector in poor areas;
Public sector growth may be counter-cyclical.
Other sources of labour supply (e.g. unemployment) other than public sector

16. Searching for crowding out - model
Influence of surplus labour?
Fixed effects
pi,t private sector employees in area i at time t si,t public sector employees in area i at time t Ui,t (workbased) unemployment rate in area i at time t i area fixed effect of area i t time fixed effect for time t
Re-run with independent variable j private sector including self-employed
Unemployment rate lagged to avoid any identity relationship
Lags of all variables included to model delayed effects

17. Searching for crowding out - data
Private and public sector employees from ABI
Self-employed and unemployed from LFS microdata
Change in
Private
Public
Private (inc. self-emp)
Unemp rate
Minimum
-22,800
-11,400
-36,800
0.0%
Percentile
10th
-3,300
-2,800
-4,600
3.0%
25th
-1,100
-700
-1,800
3.7%
50th
800
300
900
4.7%
75th
3,800
1,500
5,300
6.2%
90th
7,700
2,800
9,600
7.7%
Maximum
40,600
15,700
59,900
13.1%

18. Searching for crowding out - results
Dependent variable
Employee jobs (pi,t)
Total jobs including self-employment (ji,t)
NUTS 3 I II
III IV V VI
pi,t-1
-0.340**
-0.325**
ji,t-1
-0.352**
-0.338**
si,t
0.335**
0.055
-1.000**
0.455*
-0.012
-1.036*
si,t-1
-0.162
-1.290**
-0.152
-2.231**
si,t.Ui,t-1
24.87**
24.72*
si,t-1.Ui,t-2
25.76**
47.49**
Observations
635
508
464
591
Adj. R2
11.0%
34.7%
37.0%
7.1%%
32.1%
35.5%
Note: area and time fixed effects, and U coefficients not shown * denotes probability of coefficient equal to zero is < 5%, ** denotes probability < 1%

19. Unemployment and crowding out19
Unemployment and crowding out

20. Conclusions National impacts maybe muted, but:
Number of areas with high public sector dependency and low private sector growth
Crowding out is not an issue:
crowding out can occur in tight labour market
at typical unemployment rates, no crowding out
High public sector / high unemployment / low private sector growth vulnerable
These areas predominantly in North, South West and coastal areas.
Regional Growth Fund focused on these places

21. Vulnerability Index 1 (average rank of all three variables)
Areas ranked according to all variables, average rank calculated.
Bottom quartile taken as most vulnerable.
Problems: automatically, a quartile is most vulnerable; does not weight towards public sector

22. Vulnerability Index 2 (must be greater than English average public sector proportion to be vulnerable)
Restriction- must be greater than the English average (20.2%) of public sector proportions and one other variable
Bishop Aukland and Barrand Castle: public sector proportion= 19.1%
Problems- areas just below English average and poorly performing on other two variables