The Rural Unemployment Situation in Norway, and Policy Responses to Date

The Rural Unemployment Situation in Norway, and Policy Responses to Date

OECD Regional Policy Forum: Global Crisis, Regional Responses Paris, March 30th 2009

Roundtable 2: Preparing for a New Future: Building a Diversified and Sustainable Rural Economy

Norway is in a relatively strong position with a large Sovereign Oil Fund, a track record of budget surpluses, a trade and balance of payments surplus and relatively low unemployment. Nevertheless, Norwegian unemployment has increased from a low of around 2% in January 2008 to around 4% in January 2009. Most of this increase occurred in December-January. The increase in unemployment rises with locational centrality - i.e. closeness to cities and larger towns. The increase has also been markedly higher for men than for women, and somewhat higher for the youngest age groups.

The differences between more and less central municipalities are mainly attributed to the following factors:

• sectoral differences in the impact of the crisis and composition of local labour markets. More severe impacts in building and construction, car parts, luxury boats, wood products, fish processing and finance;
• gender differences in sectoral employment;
• lesser dependence on debt finance among the predominately small rural enterprises;
• greater self-employment and use of family labour in rural municipalities, giving greater flexibility;
• the position of temporary migrant workers.

However, there is considerable local variation. For example, some small rural towns are effectively single industry dependent, and those with car part or luxury boat clusters are currently in serious trouble, an example being Høyanger municipality in Sogn og Fjordane.

Although "labour market buffers" are recognised to be important in rural Norway, it is not thought that these will significant affect unemployment registration.

Government has deployed a mix of existing, fiscal, and monetary schemes and measures to deal with the crisis, but the use of existing mechanisms including municipality transfers predominates. The fiscal stimulus alone is estimated to expand domestic demand by 2.3% of GDP in 2009, of which the NOK 20bn package announced in January accounts for one half. Norway has a strong network of municipalities, and "district" or "regional" policy is a very important policy. The government therefore has good and up-to-date intelligence on the economic and employment situation at local levels throughout the country. Existing schemes to assist municipalities facing economic difficulties have also been deployed on an "as and when" basis, and the situation is continually under review.

What the data tells us

We can see from detailed analysis of the unemployment data by municipality that unemployment started to increase in Norway in the last quarter of 2008, but the really large increase was between December 2008 and January 2009, often doubling in the space of a month. Anecdotal evidence, together with press reports, suggests that (a) the increase in unemployment has been uneven across sectors, being much more severe in building and construction, certain manufacturing areas such as car parts, wood and fish manufacturing, leisure boat manufacture, and finance than in food processing, for example; and (b) that in sectors with significant employment of temporary migrant workers, it is often the migrant workers who lose their jobs first, and in many cases these migrants return home, for example to Poland. However, it is not possible to verify these claims statistically at this point in time.

Table 1 shows the changes in registered unemployed by centrality code, between January 2008 and January 2009. Since we do not have the data for the numbers employed, we cannot show changes in the rate of unemployment. Although we have no reason to expect dramatic changes in labour force participation rates, to the extent that the hypothesis about migrant workers proves correct there may be industries and regions where some reduction in the labour force over and above that implied by the increase in unemployment has occurred.

Roughly speaking, municipalities with centrality code 3 are the most central (urban) and those with code 0 are the least central/urban, however, it is more feasible to commute to urban centres from municipalities with sub-codes A than it is for those with codes B.

We can observe a very large increase in unemployment of fractionally over 100% in the year to January 2009, especially between December 2008 and January 2009. However, it is well to point out that, although this is serious for those involved, there was a very low rate of unemployment in Norway in the first quarter of 2008 - about 2.5%.

Most of this increase is accounted for by men, and this is explained by the fact that there is an over representation of men in the vulnerable sectors of manufacturing, building and construction, and, conversely, an over representation of women in government services including local municipalities, education, health etc.

The younger age groups appear to be worst affected, and the oldest least affected, as Table 2 shows.

The rate of increase in registered unemployed over the year increases with "centrality" as defined by SSB, thus suggesting that things are worse in urban and city areas than in more rural and remote regions in Norway. Nevertheless, this masks quite large variations between municipalities irrespective of centrality, and presumably determined by differences in the sectoral composition of local labour markets. When data become available, it would be useful to undertake some shift-share analysis of municipal employment trends before, during, and after the crisis to inform further analysis.

Discussion

There are several possible reasons why the increase in unemployment has been worse in the more urban locations of Norway. The first concerns the sector mix of employment in more rural areas, which, in general, seem to be less dependent on the most vulnerable sectors of building & construction, non-food manufacturing especially leisure boats, car parts, wood for construction, and financial services, and more dependent on relatively stable sectors, especially the public sector, primary sectors, food manufacture, and energy. An example of sectoral impacts would be Høyanger municipality in Sogn og Fjordane county, which faced closure of its one major factory dealing with car part manufacture, and where unemployment increased by 700% between January 2008 and January 2009. In fact, however, this area is category 0B - one of the least central municipalities in Norway, and illustrating the fact that there is no "golden rule" regarding rural-urban differential impacts of the crisis. However, single industry towns (often with clusters linked to single industries like auto-parts) are shown to be most vulnerable. The fate of the tourism sector is so far less known, however, due to seasonal patterns, although concerns have been raised in some rural regions for the summer season.

A second reason concerns the lesser dependence on debt of self-employed and small enterprises which tend to predominate in rural areas. This has to be evidenced, but is believed to be a viable hypothesis.

The higher levels of self-employment and use of family labour in rural firms, also gives greater firm flexibility in downturns, and may be advanced as a third reason for rural-urban differentials.

Fourthly, the position of temporary migrant workers in rural firms, who are believed to lose their jobs first and in many case return home. Again we do not know the relative importance of temporary migrant workers in different parts of Norway and in different sectors at this stage.

Brox has written on the "buffer functions" of rural areas, arguing that rural people provide important buffers for the economy as a whole in so far as people join the labour force when it is "heated" and leave it during recessions, falling back on farming, fishing, forest work and self-employment of one kind or another 1 (ref. 1). It is also well known that there can be associated rural underemployment, which rises in a recession. Therefore, as unemployment rises, we might expect unemployment data from rural municipalities to understate the true loss of employment. However, registration as an unemployed person in Norway provides access to a whole range of social benefits, and so we think that while such processes undoubtedly occur in the "real" economy, there is unlikely to be significant under-registration in the Norwegian case.

Policy Responses

In January 2009, the Government announced a series of measures through an amendment to the 2009 Budget. These amount to NOK 20 billion, of which NOK 16.75 billion is a general increasing in government spending and NOK 3.25 billion represents tax relief to businesses. In the same announcement, the government also proposed more generous loan and guarantee schemes amounting to NOK 8 billion, and including increased lending by the Norwegian State Housing Bank2 (ref. 2).

The general measures include "Green" projects dealing with renewable energy, carbon capture, electric car refueling stations, pedestrian and cycle paths, railways, nature and culture. In addition, there are increased sums allocated to municipalities for maintenance, the sick and elderly, IT, apprenticeships etc. NOK 3.8 billion is allocated to transport infrastructure. A further 2.8 billion is allocated to new buildings. Finally there are extra funds for Innovation Norway, one of the main agencies delivering regional or districts policy in Norway. It is notable that nearly all of the foregoing use existing delivery mechanisms which, because of the important role of Municipalities and Counties, and the decentralized presence of agencies like Innovation Norway and SINTEF, and coordination functions of the County Governors, are much more "joined up" than in the case in many other countries of the OECD.

Earlier measures included a NOK 350 billion facility to provide additional liquidity to the banks (swapping Government Bonds for covered bonds), increases in Export Credit Guarantees of NOK 50 billion, and a special loan of NOK 30 billion to Eksportfinans to enable continued financing of contracts that qualify for export credits.

Monetary measures include several interest rate cuts by Norges Bank since October 2008.

The Government has also had a long term scheme in place to provide extra funds to Municipalities facing especially difficult economic circumstances. In the case of Høyanger municipality mentioned above, where the only major manufacturing plant closed as a result of declining demand for car parts, a special economic reconstruction package has been announced dealing with increased social service costs, and the creation of new businesses, etc.

"District" or regional policy is a very important policy in Norway, and municipalities remain the key to this policy, being the lowest and most important apart of local government, and having significant power and autonomy. Norway also has a well developed and transparent fiscal equalization scheme which compensates municipalities for higher costs and lower revenues. The Ministry of Local Government and Regional Development (KRD) has a well developed and regularly updated information system on the economic and social situation at municipality level, and is keeping this under constant review. This review is also assisted by information from NAV (Social Security) and Innovation Norway, which also has county level offices.

It is notable that nearly all of the foregoing use existing delivery mechanisms which, because of the important role of Municiaplities and Counties, and the decentralized presence of agencies like Innovation Norway and SINTEF, and coordination functions of the County Governors, are much more "joined up" than in the case in many other countries of the OECD.

Responses to the other Discussion Questions of the Secretariat

1. Impact on Rural Economies. See above. Impact not uniform, but generally less than Urban so far. Single industry towns and settlements are especially vulnerable, raising doubts about the viability of the "clusters" approach in rural settings, especially when such clusters are not linked to local assets and competitive advantages.
2. Flows of Return Migrants. Not thought to be an issue in rural Norway at this time, although rural outmigration seems to have slowed in recent years. More likely to be increased incidence of temporary migrant workers returning to their home countries such as Poland.
3. Are there specifically rural policy responses to the crisis? Not significantly so - the responses are mainly territorial and sectoral in nature, but the use of existing mechanisms including municipalities means that regions can in effect be prioritized according to the severity of the response.
4. What opportunities arise for the future? Evidently the response is emphasizing "green economy" type measures including renewable energy, public transport and cycling/walking paths, and climate related issues. There is further scope in human and animal waste recycling but it remains in its infancy. Production based on non-basic consumption appears to be most vulnerable.
5. How can public investment facilitate the emergence of a "new rural economy"? The "green economy" offers a great deal to rural places, since space is essential. Therefore "green" investments will improve rural competitive advantage. Investment in public goods, and in transformation of public goods into human welfare (quality of life including but not only income and jobs). Human capital investments including non-formal education will be very important when large adjustments needed.
6. Barriers to emergence of a sustainable and diversified rural economy? There is considerable "path dependence" in relation to both public and private investments and their interaction, as well as within the institutional and regulatory frameworks around them. In some cases, there has also been a partial "re-centralisation" of public functions and fiscal arrangements which has reduced the fiscal and decision making autonomy and scope of local democratic governments. All are agreed that responses must build on local assets and strengths, but this implies strong and autonomous local governments. Norway is fortunate in this respect, but there are always "tendencies" concerning the powers and autonomy of municipalities, and some political parties have been vocal on such issues.

References

1. Brox, O (2006) The Political Economy of Rural Development. NL., Eburon.
2. See http://www.statsbudsjettet.no and Regionale utviklingstrekk 2008 (RUT 2008).

John Bryden (NILF) and Marte Bjørnsen (NILF and NIBR).

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Publisert 18.05.2009