THE PUZZLE OF WORKLESSNESS IN LONDON

Ian GordonGeography Department, LSE London and

Spatial Economics Research Centre

London School of Economics

LSE London seminar

15th February 2010

WHAT’s THE PUZZLE?? HIGH WORKLESS RATE in MOST ‘SUCCESSFUL’ CITY

• Worst (un)employment rates of any UK region before recession• Working-age employment rate still 2nd lowest (behind NI) 2008/9• At 69%: cf. 73% across UK – and 78% in rest of Greater South East

? RELUCTANCE (over 30 years) to ACCEPT that:• GSE not London is the functional (closed) labour market region• Its higher unemployment (at least) relative to RGSE simply due to

having many more residents with disadvantaging characteristics

? CHANGE in LONDON’s POSITION over PAST DECADE• Broader concern with ‘worklessness’ → disclosure of relatively high

levels of (voluntary?) inactivity among London WA pop • Real deterioration in some elements of worklessness

OUTLINE

1. A bit of theory 2. Why demand doesn’t explain

London’s level of worklessness 3. How far personal characteristics

do4. The puzzle of voluntary inactivity

in London

1. A Bit of Theory

2 Key Perspectives on the Labour Market

1. It is a market:– Strong version = Thurow’s ‘price auction’ model:

• People choose to work or not at a going (market) wage

– More generally:• Supply, demand and their spatial/occ distribution

interact and adapt strongly to each other and to shocks

2. But dealing in a very odd commodity:– Heterogeneous, subjective and recalcitrant

• Presenting major problems for recruitment and control– How to identify potential productivity and then get it realised

→ Likelihood of Thurow’s ‘job competition model• Competition via (real / ascribed) characteristics• Particularly for better / more secure jobs

Elements of Worklessness:• Two classic (Keynesian) components of

unemployment:• Demand – deficiency (DD)• Structural – frictional influences on job-worker matching

(SF)

• Interact so that:• DD*SF should give UE rate• SF/DD should give Vac rate• With Vac/UE measuring pressure of demand

• But spatial variations in UE rate only (not Vacs) also reflect personal characteristics of residents– So vacancy: unemployment ratio meaningless

for area comparisons

2. Why Demand Doesn’t Explain London’s Level of Worklessness

Looking for an Indicator of the Local Pressure of

Demand• In principle vacancy rates = best simple indicator

• but regular series have always been:• very incomplete • biased down for areas such as London

• occasional survey data (from Employer Skills Survey) shows:

• very different picture• Strong demand pressure in London, close to that in west of GSE

• Because of openness of TTWA level sub-labour markets demand pressure reflects not only:• local employment growth and (non-LM) migration• but also both of these across hinterlands

England_ttwa_1991_area.shp-2 - -1 Std. Dev.-1 - 0 Std. Dev.Mean0 - 1 Std. Dev.1 - 2 Std. Dev.2 - 3 Std. Dev.

Vacancy Rate Raw Estimates ESS 2001

England_ttwa_1991_area.shp-2 - -1 Std. Dev.-1 - 0 Std. Dev.Mean0 - 1 Std. Dev.1 - 2 Std. Dev.2 - 3 Std. Dev.> 3 Std. Dev.

Vacancy Rate Enhanced Estimates 2001

Two Labour Market Geographies

• Contrasts in demand-pressure still essentially N-S:• And changing north-south relativities simply reflect:

• recent employment growth differences +• impact of national economy on speed of adjustment via

labour migration

• Within north and south more local (urban-rural) differences reflecting primarily:• population sorting and (marketable) personal

characteristics

• Difference is that migration equilibrates demand differences but not compositional effects• So geography of former is much smoother

England_ttwa_1991_area.shp-3 - -2 Std. Dev.-2 - -1 Std. Dev.-1 - 0 Std. Dev.Mean0 - 1 Std. Dev.1 - 2 Std. Dev.2 - 3 Std. Dev.

Pressure of Demand 2001 (version 12..12.08)

England_ttwa_1991_area.shp< -3 Std. Dev.-3 - -2 Std. Dev.-2 - -1 Std. Dev.-1 - 0 Std. Dev.Mean0 - 1 Std. Dev.1 - 2 Std. Dev.2 - 3 Std. Dev.

Non-Demand-Deficient Component of Unemployment 2001 (version 12.12.08)

North-UK unemployment rate trends: actual and modelled

Long Run Persistence in Conurbation Inactivity Levels

3. How Far Personal Characteristics Do

Personal Characteristics and Labour Market

Outcomes• In ‘job competition’ view personal characteristics

affect individuals’ chances of being in work via:• the position they are allocated in queue for jobs• as well as influences on their decisions to participate or not

• These characteristics may also be a product of labour market experience

• And how they matter is contingent in both:• Prevailing employer attitudes, and• The intensity of competition for jobs

• These are reflected in how population mix affects area level outcomes

Significant Influences on Chances of being Workless (GSE

summer 2009)• Housing tenure: mortgaged (-); social renter (+)• Ethnicity/religion: white (-); muslim (+, esp for women);

language difficulty at work (+)• Family status: married/cohabiting (- - for men, + for

women); women with child under 4 (+)• Age: young (16-24 +); old (over 60 +)• Education: no qualifications (+); later completion age (-)• Health: long term limiting condition (+)

• Control for these leaves:• Positive but non-significant London-GSE difference for UER• But more substantial reamaining diff in inactivity rates

Significant Impacts on London/GSE diff

Demand slack, bumping down and marginalisation

• In job competition model, if wages don’t adjust to fall in demand:• Redundant workers regain employment by moving down a

level in job hierarchy• Thus displacing others and• Crowding the lowest tiers (where wages may adjust)

beyond their capacity – leaving least desirable in unemployment

• Similar affects among workless push some into LT unemployment and inactivity

• Expect this to persist beyond upturn until point where slack is eliminated

• Cf London / GSE trends over 1980s/90s

Labour Market Slack && London-GSE

unemployment

Trend Looked Rather Good, but ...

• Convergence in unemployment rates stopped soon after

• And it was not really evident in activity rates:• Reflected some special factors:

• Growth of London’s student population• And of Muslim population with low female employment rates

• But more general growth in numbers reporting lack of interest in work (as well as lack of action to seek)

Trends in London Worklessness Relative to RGSE 1996-2009

The London-RGSE Inactivity Rate Gap 1992-2005

4. The Current Puzzle: Rising Voluntary Inactivity in London

3 Conjectures about Voluntary Worklessness in

London• Greater concentration of people living outside

the economic mainstream:• Selectively attracted to / produced by the

metropolitan environment

• Particular lack of part-time employment opportunities

• Impact of recent immigration from poor countries on wages in entry-level jobs

Alternative Life Styles/Conditions

• Particular non-economic attractions of London may include activities given priority over work

• And/or stresses of metro life may alienate more people from social interactions including work

London’s Lack of Part-time Work

• Particularly salient for (voluntary) inactive:• 49% nationally ‘expected’ in PT not FT work

• Particularly lacking in London:• 20% of London jobs, 22% of Londoners; 27% in RUK • 89% of Central London jobs are FT

• Partly reflects pop mix ? or supply-side constraints• More singles in London • Lack of local, car accessible jobs ? Or child care?

• But larger PT:FT earnings gap suggests primarily demand-side issue

Influences on PT Labour Demand

• Fractional demands for partic jobs• In small establishments

• Concentration of demand in peak hours• For local/personal service jobs

• Exploiting a reserve of cheap labour• Where others not available on FT basis

• All likely to be less relevant in London ?• Scale economies → more large establishments• less local work + 24/7 consumption culture and • immigrant labour pools

Immigration and the Bottom End of the Labour

Market• It is widely understood that immigration has more/less neutral

impact on balance of labour supply/demand:→ no predictable impact on average wages / earnings levels: – No sig effects actually found in UK

• But may affect distribution of earnings etc., depending on complementarity with domestic labour supply

• Some evidence of falling earnings at the bottom

• In London case, can see:• New migrants from poor countries initially concentrated in bottom 20% of

jobs• Have depressed (relative/absolute) earnings there – by up to 15% in

period of peak arrivals at/after millennium• Inducing employment growth there – but reducing employment incentives for those with no access to other job types

• Potentially → growth of ‘voluntary’ inactivity

In-migration from Overseas (per cap)

0.0

1.0

2.0

3la

g m

igra

tion (

pop.a

dju

ste

d)

1975 1980 1985 1990 1995 2000 2005 2010year

LONDON SE & ESWest WMids

EMids Yorks&HNWest NorthWales Scot

London Migrant Jobs by Type and Quintile

2005-6

Migrant Origin

Years in the

UK

Bottom quintile (<£6.4 ph)

2nd quintile (£6.4-£7.5)

3rd quintile (£7.5-£9.9)

4th quintile (£9.9-£13.5)

Top quintile (> £13.5

ph)

Non-Migrant

.. 21% 20% 21% 19% 20%

High Wage countries

0-3 18% 14% 12% 21% 35%

HWC >3 19% 15% 16% 22% 28%

Asylum Countries

0-3 31% 24% 14% 13% 18%

AC >3 23% 20% 14% 21% 22%

Other Low Wage countries

0-3 46% 20% 10% 14% 11%

OLWC >3

25% 19% 16% 17% 22%

Source: Annual Population Survey 2005-6

Relation between Years in UK and Working in Bottom Quintile Jobs

for Migrants from Poor Countries

0.00 10.00 20.00 30.00 40.00

Years in the UK

0.20

0.25

0.30

0.35

0.40

0.45

0.50

Pro

po

rtio

n i

n B

ott

om

Qu

inti

le

Bottom Quintile Earnings

0.5

11.5

2lo

g w

age o

f bott

om

quin

tile

1975 1980 1985 1990 1995 2000 2005 2010year

LONDON SE & ESWest WMids

EMids Yorks&HNWest NorthWales Scot

Looking for Evidence on These

• ‘Alternative Life Style’ via 2000 Psychiatric Morbidity Survey• Controlling for mental illnesses / depression and drug /

cannabis use• Did not substantially reduce London differential

• ‘Part-time Job Gap’ + ‘Migrant Wage’ effects tested by:• Inserting measures of salience for indivs in LFS micro-data

analyses for years 1996-2009 – across GSE• Measures are logit estimates for probability of:

• Being in PT rather than FT job• Working in bottom quintile (lowest paid) job (occ/role) not higher• Estimated across UK in relation to personal characteristics

• Interacted with:• London dummy + share of PT jobs (for PT)

• does it explain gap ?

• London + relative wages in bottom quintilre (for Migrant Wage)• does it explain change in gap ?

Still Puzzling Away - But …

• Evidence so far (at least) consistent with Migrant Wage story– Tho compositional factors also contribute to upward

drift in London inactivity

• Still no evidence of substantial connections with local employment change– Tho U/E in Outer London may be a little higher due to

lack of job growth there

• Dominant explanation for high London worklessness is still personal characteristics– Or rather: the way the labour market treats these– In any case not primarily a simple matter of ‘skill’