Regional skill relatedness: towards a new measure of regional related diversification

Abstract

This paper proposes a novel index of regional skill-relatedness and calculates this measure for all Norwegian labour-market regions. Studies of regional related diversification rely on measures of related variety, which build on the industry classification hierarchy. However, the growing literature identifying similarities in knowledge and competences across industries demonstrates that these classifications fail to identify a great deal of actual skill relatedness, and that measures based on empirical measures of industry relatedness are required. The skill relatedness measure builds on labour mobility flows across industries to develop a relatedness matrix for Norwegian industries. It further uses social network analysis to identify the number of other regional industries to which each industry in a particular region is related. Comparing this measure to the related variety index, the analysis shows that the two measures are highly correlated, but that the regional skill relatedness index is able to identify more of the relatedness across industries. In particular, the related variety index tends to underestimate the level of relatedness in many of Norway’s most technologically sophisticated manufacturing regions, whereas these rank highly in the regional skill relatedness index. Consequently, the regional skill relatedness index represents a promising new tool for identifying relatedness in regional systems.