Interaction of Regional Population and Employment

We investigate the interaction of regional population and employment in a simu1taneous model, allowing for interregional commuting. The proposed dynamic specification distinguishes between short-run and equilibrium adjustment effects and it encompasses the lagged-adjustment specification that is standard in the literature. We interpret the long-run relationship between levels of population and employment as a labour market equilibrium. The model is estimated on a panel of 1973-2000 annual data for 40 regions in The Netherlands, controlling for region and time-specific heterogeneity. Identification of the model is improved by decomposing population growth into net interregional migration and exogenous natural popu1ation developments. We find that employment growth responds quite strongly to deviations from regional labour market equilibria. Net migration is dominated by housing market developments and in the short run on1y slightly affected by increases in regional employment. The main implication is that equilibrium on regional labour markets is obtained through adjustment of employment instead of population. We test and reject the lagged-adjustment specification.