By Katharine Mullock.
The recent fires in Fort McMurray in Canada have drawn international attention to this prosperous oil town. Residents of Fort McMurray were forced to evacuate their homes this week, after many moved from all over Canada to take advantage of high wages and strong employment demand in a town known more for its industry than for its charm. The internal migration to Fort McMurray is a prime example of how individuals respond to economic incentives and changing skill demands by moving from one region to another. Along with training and occupational mobility, the movement of people from place to place is an important means by which the labour market adjusts to changing skill demands. To the extent that individuals move to places where their skills earn a higher return, a mobile labour force helps to allocate skills to where they are most needed within a country.
Whenever shortages in a particular skill (e.g. drilling) emerge in one part of the country jointly with surpluses for the same skill in another part of the country, this likely reflects barriers to internal geographical labour mobility. Some of these barriers may be linked to inefficient institutional arrangements, limiting mobility. Others are not. Moving-related costs factor in to an individual’s decision about whether to move for work. These costs include everything from a plane ticket, to transporting one’s household items, to finding a new child- care arrangement, doctor, dentist, and gym. Relocating can also mean in some cases operating in one’s second language or having to learn a new language, which comes with efficiency costs. Personal preferences can also present barriers to moving – one may prefer the old location to the new one, or dislike the idea of being disconnected from personal and professional networks. Other barriers to moving for work are, instead, related to the specific policies and regulations in place in the origin or destination region. Among these, the loss of pension entitlements, reduction in welfare benefits, lack of credential recognition, poor communication of labour market opportunities in other regions, and housing market frictions are some of the most important.
Canadians are often perceived to be less mobile than their southern neighbours, based on comparisons between Canada’s inter-provincial migration rate and the U.S. inter-state migration rate (see for example Molloy, Smith, Wozniak, 2011 and OECD Employment Outlook, 2005). According to national Census data, in 2011 about 1.6 per cent of Americans moved between states, while only 0.7 per cent of Canadians moved between provinces. But comparing movement across U.S. states with movement across Canadian provinces is not entirely accurate, since a Canadian province is on average four times larger in area than a U.S. state. In their 2014 “Jobs Report: The State of the Canadian Labour Market” officials at Canada’s Department of Finance conducted a comparison of internal mobility between Canada and the United States which uses geographic units which are closer to one another in terms of size and population density, i.e. U.S. counties and Canadian census subdivisions. Taking these within-province/state labour flows into account reveals that Canadians and Americans are equally mobile, with about 4 per cent of either population moving within states/provinces each year.
In addition to those who change permanent residence for work-related reasons, many more Canadians commute to work in a different province than that of their permanent residence. As a result of this relatively high internal mobility, disparities in employment rates and income levels across provinces have been steadily declining since the 1970s (OECD Economic Survey of Canada 2014), possibly suggesting that labour and skills are being allocated to where they are most needed. Indeed, previous evidence confirms that greater geographical mobility leads to improved skill matching. A forthcoming paper from the European Union shows that the skills of individuals who move to a different region or country for work are less likely to be underutilized in their new job. Findings from the Netherlands, as well, show that mobile graduates are more likely to find jobs that match their skill levels (Hensen, De Vries and Cörvers, 2008).
While internal labour mobility may come with social benefits like greater cultural integration, it may also come with social costs like community deterioration and social tension (see Bonin et al. (2008) for a discussion of the optimal level of geographical labour mobility, which identifies social and economic externalities to labour mobility). Economic conditions in the region of origin may worsen as young and highly-skilled workers leave. Even so, reducing policy-induced barriers to labour mobility remains a worthwhile policy objective, as it allows for better matching of skill demand and supply, which affords economic benefits for individuals, firms and economies as a whole. Several OECD reports recommend policy measures to reduce barriers to geographical labour mobility within countries where regional disparities are pronounced, including making housing policy less restrictive, ensuring that welfare benefits do not inhibit mobility, improving recognition and harmonization of credentials across jurisdictions, improving portability of pensions and providing financial assistance to movers, particularly the unemployed (Preventing Unemployment and Underemployment from Becoming Structural, 2014 and OECD Employment Outlook, 2005).
But internal labour mobility alone is not enough to address changing skill demands. If the national supply of skills is not sufficient to meet aggregate skill demand, shortages are likely to arise and internal labour mobility will not be able to fill these gaps. The OECD’s recently published “Getting Skills Right” report discusses a number of best practices for addressing changing skill demands. In particular, skills assessment and anticipation exercises can be used by governments and stakeholders to inform responsive education and labour policy, as well as the development of immigration policy that gives priority to applicants with in-demand skills.
Certainly for the residents of Fort McMurray, low barriers to internal labour mobility improve their chances of adjusting to shocks like the one they are currently facing. Economic activity in Fort McMurray had slowed even before the fires, due to declining oil prices. With a fifth of homes destroyed, activity is likely to slow even more as plants operate with fewer employees. Over the next few weeks, as residents are permitted to return to their homes to assess damage, they will need to decide whether to stay in Fort McMurray or to take their skills on the move again in search of better economic opportunities.