Testing for common trends in regional unemployment

The well-known phenomenon that regional unemployment rates in the UK rise and fall together is examined. Typically, this is attributed to the influence of the aggregate economy. However, there may be a number of shared influences at work. Two recently developed multivariate techniques - those of Bossaerts (1988) and Johansen (1988) - are used to examine the number of common trends. The analysis shows that the simple picture of macroeconomic fluctuations determining the current general level of unemployment in the regions whereas regional factors determine long-run unemployment relativities fails to capture the nature of the regional unemployment problem by several dimensions. Instead, regional unemployment series appear to share a number of common non-stationary components. Alternatively, there are a number of independent linear combinations of regional unemployment rates that are stationary. Under the common trends interpretation, the results are not too surprising. The type of supply-side arguments used to explain the unit root in Granger and Newbold (1974) presumably affect all regions.