Model-based classification of regional labour markets

4 1 The basic classification problem. 5 2 Background of the analysis . 7 3 The method in two steps . 10 3.1 Background . 10 3.2 Integration rate for further vocational training measures.12 3.3 Exit rate from unemployment into non-assisted employment . 15 3.4 Consequence for the classification of employment office areas . 18 3.5 Procedure used in the cluster analysis . 19 4 Results.21 4.1 Comparison types.22 4.2 Strategy types . 28 5 Applications and further perspectives . 29 Appendix 1: Type membership of the employment office areas, and regional values of the classification variables . 32 Appendix 2: Definition of the indicators included . 42 Appendix 3: Maps in black and white . 44 References . 46 IABDiscussionPaper No. 29/2006 4 Abstract In many countries fairly large and persistent regional disparities can be observed for a variety of economic indicators. Since these disparities can not be reduced to one single dimension, a classification system is needed to give a parsimonious overview. The article presents a system which is designed to assess labour market policy in Germany. The innovation in this article is the development of a procedure that combines the analysis of determinants of regional disparities with standard classification approaches. The procedure is designed to solve two problems of many existing classification schemes: firstly, their purely descriptive nature and secondly, their interpretation with relation to arbitrarily chosen classification variables. The proposed method is used to identify 12 types which show the regional diversity of labour markets in Germany.In many countries fairly large and persistent regional disparities can be observed for a variety of economic indicators. Since these disparities can not be reduced to one single dimension, a classification system is needed to give a parsimonious overview. The article presents a system which is designed to assess labour market policy in Germany. The innovation in this article is the development of a procedure that combines the analysis of determinants of regional disparities with standard classification approaches. The procedure is designed to solve two problems of many existing classification schemes: firstly, their purely descriptive nature and secondly, their interpretation with relation to arbitrarily chosen classification variables. The proposed method is used to identify 12 types which show the regional diversity of labour markets in Germany. JEL-Classification: R23, R11, R50 Uwe Blien and Franziska Hirschenauer were members of project group 2.5 in the context of the masterplan for the reorganisation of the Federal Employment Agency (Bundesagentur für Arbeit). The project was headed by Uwe Blien. Many thanks go to the other members of the project group Manfred Arendt, Hans Jürgen Braun, Dieter-Michael Gunst, Sibel Kilcioglu, Helmut Kleinschmidt, Martina Musati, Hermann Roß, Dieter Vollkommer, Jochen Wein. We thank Johann Bacher (University of Erlangen-Nuremberg), Felix Rüb (IAB), Michael Wiedenbeck (ZUMA) and Katja Wolf (IAB) for methodological advice. We also thank Elke Amend (IAB) and participants of the ERSA Conference in Amsterdam for critical comments on earlier versions of this article. Finally we are grateful to Hannelore Brehm and Karen Scott-Leuteritz for valuable support with the analyses and in drawing up the report. All responsibility for the article presented here, however, remains with the authors. IABDiscussionPaper No. 29/2006 5 1 The basic classification problem In Europe, regional labour market disparities within many countries are of about the same magnitude as differences between countries (Südekum 2005). In many respects the unemployment rate is the most crucial variable for characterising regional labour markets. However, the labour market problems of large cities are quite different from those of rural areas even if the unemployment rate is the same. Yet the disparities in labour markets and in other aspects of the regional economy have more than one dimension, so they can not be reduced to one single variable. To understand the pattern of regional disparities a strategy is required to condense the multitude of dimensions. A typology of regions is informative with respect to at least three aims: − To assess the consequences of special policy measures. If regional units implementing policies have some discretion concerning the blend of measures, a comparison of the outcomes could help to find the optimal mix and to assess the effectiveness of the efforts. However, only regional units which respond to a labour market situation that really is comparable should be compared. “Good” labour markets in the rural countryside require different strategies from “bad” labour markets in agglomerations. Markets with a strong seasonal component should be treated differently again. A classification or a typology of regions could help in this respect. There are many policy strategies which have a regional component and which could be improved by using a typology of regions. − To obtain a clear picture of the spatial structure of the economic situation: Is the economy characterised by large-scale or small-scale disparities? Are there sharp differences between regions or can a tendency be observed which leads to the blurring of differences? How do agglomeration effects show up? All these questions are interesting since they concern basic problems of regional analysis. − To provide background information for research studies. The design of evaluation studies on the effectiveness of labour market policy is often based on data about individual respondents. The success of a group of individuals who have received a certain “treatment” is compared with their “statistical twins” that have not been treated. Within this context, it is necessary to control for the labour market situation. Again, a typology could be useful. Another important research application concerns the drawing of survey participants. The survey should map regional disIABDiscussionPaper No. 29/2006 6 parities. Stratification according to types might be helpful to ensure representativeness. The regional typology developed in this paper is related to the first aim, but is useful with respect to the other two. Its primary purpose is the support of labour market policy, which has to deal with regional variation in the labour market situation. In order to develop an appropriate policy response it is helpful to condense the disparities and thus to classify regional labour markets into types. For classifying regions we suggest a new approach which could be used for many other classification problems. Why is a new approach required? The standard approaches to classification, either regional classification or other problems concerning classification, (see textbooks e.g. Romesburg 2004 and Kaufman, Rousseeuw 2005, Bacher 1994) proceed in the following way. Some variables are chosen on the basis of theoretical or practical considerations and then a method of cluster analysis is applied, which generates a classification. This result depends strongly on the variables chosen (and on their weights, if there are any). However, this selection of the classification variables usually poses difficulties. It can be shown that the available theory normally gives only relatively vague hints as to which variables are to be chosen. Frequently, the selection follows an arbitrary decision based on “expert knowledge” rather than on a methodological principle which could also be applied by a third person. If no expert knowledge is available, a trial and error procedure is applied that is often guided not by the problem at hand but by the desire to generate a nice, plausible solution. The classification procedure is applied repeatedly using different sets of variables until the desired result is achieved. The approach chosen in this paper can help with the selection of variables. As a consequence the reliability of the results can be improved. In the following this is demonstrated with the classification of German labour markets. It was developed for the assessment and management of regional labour market policy. By applying the proposed method 12 types of region can be identified, which shows the diversity of labour markets in Germany in a parsimonious way. In the short time since this classification was introduced it has been widely applied for many purposes of practical labour market policy and scientific research. IABDiscussionPaper No. 29/2006 7 The remainder of this paper proceeds as follows. In the next section we describe the specific classification problem which we use to demonstrate our approach. In the third section the analysis is carried out. In the fourth section we present results. The final section concludes by outlining applications and perspectives. 2 Background of the analysis Strategies of labour market policy have to deal with regional variation in the labour market situation. In Germany, regional unemployment rates vary between 4% and 27% (Sept. 2004) and other variables show similar variation. Most of these variables are correlated, but not perfect