The microchip was causing scar tissue to form which was connecting the underlying tissue layers to scar to the skin above. They had to remove all of this tissue and the chip. The scarring the chip was causing was impeding his shoulder movement and the vet said if they didn't remove all the tissue he would have constant pain for life. We are still waiting to find out if the tissue developing around the chip is cancerous.
I can say, that I will never microchip an animal again, especially a small dog. Guess this is common in cats.