Location Quantities and Shift-Share Analysis Assignment 7; 11.08.2015 Jacqueline N. Tkac

INTRODUCTION This report provides a brief review of the specific metric of employment sector analysis called Location Quotients (LQ) and Shift-Share. The analysis area focused on in this report is Richmond, Virginia, and the comparison area is the United States.

Location Quotients and Shift-Share Analysis

Location quotient (LQ) is a valuable way of quantifying how concentrated a particular industrial sector is in a certain region (in this case, Richmond, Virginia) as compared to a comparison area (in this case, the United States), according to a particular asset. A LQ for a particular industry is a ratio that compares the percentage of employment in a particular industry in a local economy, to the percentage of employment the same industry holds in a larger comparison area. Employment is the measure used most often to measure economic activity when finding LQs because it is the measure that is most generally available in the greatest industrial detail at a local level. A LQ identifies where the local economy is specialized and sectors where it may be underdeveloped. The industries that are most valuable to a local economy’s growth are the ones that produce goods and services that are sold outside of the local economy, which generates an inflow of income. These industries are known as an area’s “economic/export base” because they generate the income that sustains the local-serving sector of the economy. The LQ can be found using this formula:

LQ1 = (ei/e) / Ei/E); Where:

ei: Local employment in industry i e: Total local employment

Ei: National employment in industry i E: Total national employment

LQ analysis indicates which industries have a comparatively larger (or smaller) presence in the local economy. A LQ equal to 1.0 means that the share of employment in a particular industry in a local economy is exactly the same as the share of employment in the same industry nationally. A LQ greater than 1.0 indicates that an area has proportionately more workers than the larger comparison area employed in a specific industry sector. This implies that an area is producing more of a product or service than is consumed by the local residents, making it likely the excess product is being exported outside of the area. The portion of employment that causes the LQ to exceed 1.0 is assigned to the economic base and is given credit for supporting the economy as a whole. A LQ less than one means that the local employment in a particular industry is less than the national share of employment in the same industry. With a LQ less than one, industries are assumed to be local-serving or non-basic industries. Focusing on extremes (LQs greater than 1.25 and less than .75) can be useful when looking at economic development. Although it is implied with an LQ greater than 1.25 that an area industry is an export-base, it does not necessarily mean that an area industry is indeed exporting, an excessive local demand could also be the case. Area export industries (LQ > 1.25) are useful to identify because it indicates a specialization within a local area. A LQ less than .75 may indicate an opportunity or a necessity to develop an area industry.

A LQ on local industries needs to be considered in light of an area’s “economic geography,” which is the complex geographic, population, and market characteristics that define its position in the regional economy. This information along with a LQ can be utilized to define acute issues and establish directions for later evaluation of local resources and response options. It is important to be aware of some assumptions underlying the use of LQs. These are: that demand or consumption patterns are constant across regions and that income levels are also constant; that labor productivity does not vary from region to region; and that each firm in an industry produces an identical product. These assumptions are problematic due to reasons like national demand patterns vs. local demand patterns; unless the local economy as a whole resembles that national profile, distribution deviations between the two areas does not necessarily mean there is a production excess or shortfall in the local area. Shift-share analysis is a method of analyzing differences between growth in a local economy and growth in the national economy. It determines how much of the regional growth is due to national trends and how much is caused by different regional factors. It isolates the effect of local influences on growth from effects that operate industry-wide or at the national level. The variations in local effects across industries can indicate different

strengths and weaknesses of the local economy. This analysis can also identify the contribution of an area’s industrial structure (“industrial mix”) to the local economic growth overall. To conduct shift-share analysis, we split regional job growth into three components: industrial mix (IM), national share (NS), and local factors (LF). An industrial mix reflects industry specific factors or an economy’s overall industrial mix; a national share reflects trends in the larger economy of which the subject area is a part; and local factors reflect local influences on industry performance. These three factors sum to equal the observed change in local employment or earnings. The difference between an industry’s performance in the local economy and what would have been expected based on the same industry’s performance nationally is called the “local” effect. The total local or differential shift for the entire economy is the sum of the individual differential shifts for each industry. The industrial mix effect for an area economy as a whole is simply the sum of the industry mix effects for all the individual industries. When assessing economic performance and condition, the first step is to examine the overall performance and condition of a local economy. Key questions to answer in order to identify indicators of local economy vitality are ones such as “compared to other areas how has the local economy performed over time in terms of employment growth?” Answering questions like this help the analyst consider how broad indicators of economic activity have changed over time and in comparison to other areas. Because local economies differ in what type of industry they engage in, it is important to look closely at the industrial structure of the local economy.

Description of Location Quotients

Table 1 contains a graded color scale in 3 different columns (2013 Employment, 2002-2013 Employment % Change, and LQ Change 2002-2013). The purpose of the graded color scale shown on Table 1 is to display more clearly the lowest and highest values of each section, and the range of values in between (the graded scale coloring is the same throughout all of the tables in this report). The cell that is the darkest red in each column shows the lowest value in each category. The cells that are close to red are the lower values in each category. As the colors lighten up from red and shift closer to yellow (i.e. darker orange is a lower value than a lighter orange), they get closer to the midpoint value of the category. The darkest yellow cell in each column show the midpoint values. As the colors shift from yellow to a lighter green, the value of the cell is increasing. The darkest green cell in each column is the highest value (more detail in Table 2 description).

Table 1 also shows the Employment Percent Change in different sectors, which indicates Richmond’s economy’s ability to retain and create jobs within these sectors. These sectors show the underlying structure of Richmond’s local economy, revealing what the local economy produces. By displaying the Employment % Change, analyzing industry growth performance and patterns between different employment sectors becomes easier to do. As displayed in Table 1, Education and Health Services has the highest increase in Employment between 2002 and 2013, showing growth in that particular Employment Sector, implying an increase in demand in this particular sector, and a positive change in this industry’s local competitive advantages causing more concentration in the local economy. The LQs on Table 1 indicate that the only industry sector in Richmond that maintained being considered a local export base component from 2002 to 2013 was Financial Activities, this sector is also experiencing a growth in employment, making it a strong performing industry.

Table 1. Table 1 shows the employment numbers for 2013, the percent change from 2002-2013, the 2002 LQ, the 2012 LQ, and the LQ change for specified employment sectors in the Richmond MSA.

Employment Sectors

2013 Employment2002-2013 Employment % Change

2002 LQ 2013 LQLQ Change (2002-2013)

Mining, Logging, and Construction 34,400 -15.1% 1.234 1.107 -0.126

Manufacturing 32,200 -36.99% 0.744 0.578 -0.167

Wholesale Trade 28,700 13.9% 0.991 1.076 0.085

Retail Trade 68,800 3.0% 0.988 0.983 -0.005

Transportation and Utilities 20,900 4.0% 1.058 1.002 -0.056

Information 7,900 -36.3% 0.812 0.634 -0.178

Financial Activities 47,800 2.4% 1.305 1.307 0.002

Professional and Business Services 98,900 12.8% 1.220 1.148 -0.072

Education and Health Services 92,300 60.8% 0.779 0.942 0.163

Leisure and Hospitality 57,900 30.1% 0.825 0.876 0.051

Other Services 30,800 24% 1.030 1.215 0.184

Government 112,400 1.9% 1.140 1.108 -0.032

Table 1. Location Quotient Change, Richmonds MSA (2002-2013)

Table 2 is marked with gray upward facing arrows when the LQ value is equal or above 1.2, downward facing arrows when the LQ value is less than .8, and black dots when the LQ value is less than 1.2 and greater or equal to .8. The numbers are bolded when the LQ value is approximately equal to .8. The LQ change (2002-2013) column contains a data bar that is dark maroon when negative, and bright blue when positive. This data bar shows (along with the graded color scale), the level of extremity in LQ change in each sector between 2002 and 2013. This data shows more clearly which Employment Sectors increased and decreased during this time frame, and also which sectors are considered to have high levels of relative concentration and de-concentration.

Table 2. Table 2 shows the employment numbers for 2013, the percent change from 2002-2013, the 2002 LQ, the 2012 LQ, and the LQ change for specified employment sectors in the Richmond MSA, including icons

described above.

Employment Sectors2013 Employment

2002-2013 Employment % Change

2002 LQ 2013 LQ LQ Change (2002-2013)

Mining, Logging, and Construction 34,400 -15.1% 1.234 1.107 -0.126

Manufacturing 32,200 -36.99% 0.744 0.578 -0.167

Wholesale Trade 28,700 13.9% 0.991 1.076 0.085

Retail Trade 68,800 3.0% 0.988 0.983 -0.005

Transportation and Utilities 20,900 4.0% 1.058 1.002 -0.056

Information 7,900 -36.3% 0.812 0.634 -0.178

Financial Activities 47,800 2.4% 1.305 1.307 0.002

Professional and Business Services 98,900 12.8% 1.220 1.148 -0.072

Education and Health Services 92,300 60.8% 0.779 0.942 0.163

Leisure and Hospitality 57,900 30.1% 0.825 0.876 0.051

Other Services 30,800 24% 1.030 1.215 0.184

Government 112,400 1.9% 1.140 1.108 -0.032

Table 2. Location Quotient Change, with Icons Richmonds MSA (2002-2013)

Figure 1 supports the earlier drawn fact that Financial Activities is the only sector who maintained a highly relative concentration between 2002 (light blue), and 2013. Figure 1 makes the data more visually clear in comparing the LQ values between 2002 and 2013.

Figure 1. Displays graphically the change in the LQ value in the analysis area of Richmond, VA MSA during years 2002 and years 2013.

The exact change in the LQ value of each sector between 2002 and 2013 is display in Figure 2. Sectors that had a shift of -0.1 in this time frame are: Mining, Logging, and Construction; Manufacturing; and Information. This negative shift in LQ means that the industry’s concentration are becoming less concetrated. Industries such as Mining, Logging and Construction and Professional and Business Services, that were considered to be an export base in 2002, are now no longer considered as such. This means that Richmond lost a part of its export base and should plan accordinly. The sectors that had a shift of +0.1 are: Education and Health Services; and Other Services. This positive shift means that these industries are becoming more concentrated in the region over time.

Figure 2. Displays graphically the amount of change in the LQ value in the analysis area of Richmond, VA MSA between years 2002 and years 2013.

Figure 3 identifies clearly which Employment Sector had what LQ Value in 2002 and which Employments Sectors had an increase in LQ or a decrease.

Figure 3. Displays graphically the amount of change in the LQ value in the analysis area of Richmond, VA MSA between years 2002 and years 2013.

Description of Shift-Share Analysis

The total growth represented on Table 3 accounts for the employment resulting from overall national growth. The numbers displayed here are the change in U.S. total nonfarm employment applied to each individual sector; this uses the growth rate for total non-farm employment in the United States to indicate how much each row category would have increased if it had equaled the overall growth rate. The Employment sector that has had the least growth in the MSA is Manufacturing. The industry mix accounts for the employment resulting from national growth within each employment sector, which was calculated here by multiplying the United States Sector growth rate times Richmond employment in the sector in 2002, minus the overall United States growth effect. The local shift effect reflects the employment change after taking away the national growth effect and industry mix, this is the difference between an industry’s performance in the local economy and what would have been expected based on the same industry’s performance. This shift explains how much of the change in each sector is caused by a unique competitive advantage or disadvantage that a particular region possesses. In most sectors in Richmond, the percent change in employment between 2002 and 2013 are increasing for the same sectors as the local shift. The total local shift for the entire economy is the sum of the individual differential shifts for each industry. A positive value in the Local Shift Effect column means that this particular employment sector in the Richmond MSA is outperforming national trends in this sector, a negative effect means that the Richmond MSA is underperforming compared to national trends in this sector.

Table 3. Table 3 provides a shift-share analysis including total growth effect, the mix effect, and the shift effect.

Local

Employment Sector Total Growth Industry Mix Local Shift

Mining, Logging, and Construction 1,780 -5,131 -2,749

Manufacturing 2,245 -13,139 -8,006

Wholesale Trade 1,107 -686 3,079

Retail Trade 2,935 -2,706 1,771

Transportation and Utilities 883 407 -491

Information 545 -3,138 -1,907

Financial Activities 2,052 -2,498 1,546

Professional and Business Services 3,854 10,331 -2,985

Education and Health Services 2,522 14,038 18,339

Leisure and Hospitality 1,955 6,420 5,024

Other Services 1,094 -668 5,474

Government 4,847 -3,047 300

Table 3. Shift-Share Analysis

National

The Education and Health Services Employment Sector had an increase by 34,900 jobs in the Richmond MSA from 2002 to 2013. If this sector had grown in Richmond at the overall national growth rate of 4.4% from 2002 to 2013, it would have increased by 2,522 jobs. However the sector increased by 28.9%, so the industry mix effect was a gain of 14,038 jobs. The MSA gained 18,339 jobs which is classified as the local shift effect, meaning this particular sector in Richmond is outperforming national trends. Manufacturing, declined by 18,900 jobs in the Richmond MSA from 2002 to 2013. If the sector had grown at the overall national growth rate, it would have increased by 2,245 jobs. But because the sector declined nationally and the industry mix effect was a loss of 13,139 jobs. The MSA lost 8,006 jobs due to local shift effect, meaning that Richmond as a local area has more of a decline in this employment sector than the national decline.

Figure 4. Figure 4 illustrates a shift share analysis within each Employment Sector against annual Employment Change from 2002 to 2013.

Table 4 shows the subsectors of each employment sector that were not included in Table 3. According to this table, subsectors in this case do not differ from their sector totals substantively. The State Government sector is growing nationally, but it is growing at a rate slower than the overall national growth rate, so due to the Industry Mix Effect, in the Richmond MSA this sector is declining, indicating that the Richmond area is dealing with disadvantages along with the State Government Employment Sector has a whole as an industry. This is also the case with the Employment Services sector. The Professional and Business Services sector increased by 11,200 jobs in the Richmond MSA from 2002 to 2013. If the sector had grown at the overall national growth rate, it would have increased by 3,854 jobs. Because the sector increased nationally and the industry mix effect was an increase of 10,331 jobs, the MSA lost 2,986 jobs due to local shift effect, meaning that Richmond as a local area has more of a decline in this employment sector than the national decline, and that this is an Employment Sector that the Richmond area does not have regional advantages with and needs to be improved on, which is also the case with the Transportation and Utilties Sector as well as the Administrative and Support and Waste Management and Remediation Services Sector. The local shift effect also shows issues with the Richmond MSA in the following sectors/sub-sectors, where the national growth rate for the industry is increasing, but due to local problems, the jobs in the Richmond area are decreasing: Professional and Business Services; Management of Companies and Enterprises; Employment Services; and State Government.

Table 4. Table 4 provides a shift-share analysis that includes subsectors (highlighted in light blue and bolded) including total growth effect, the mix effect, and the shift effect.

Local

Employment Sector Total Growth Industry Mix Local Shift

Mining, Logging, and Construction 1,780 -5,131 -2,749

Manufacturing 2,245 -13,139 -8,006

Trade, Transportation, and Utilities 4,921 -3,283 4,762

Wholesale Trade 1,107 -686 3,079

Retail Trade 2,935 -2,706 1,771

Transportation and Utilities 883 407 -491

Information 545 -3,138 -1,907

Financial Activities 2,052 -2,498 1,546

Professional and Business Services 3,854 10,331 -2,985

1,301 5,275 2,524

949 3,952 -5,102 ,

1,604 1,844 -1,147

690 -450 -1,240

Education and Health Services 2,522 14,038 18,339

2,162 12,235 16,403

Leisure and Hospitality 1,955 6,420 5,024

1,586 5,508 4,605

Other Services 1,094 -668 5,474

Government 4,847 -3,047 300

699 -699 900

1,828 -1,671 -1,957

2,325 -1,044 1,620

National

Table 4. Shift Share Analysis Including Subsectors

Results

In the Richmond LSA, The Mining, Logging, and Construction industry that was considered to be an export base in 2002, had an LQ that declined to the level where it was no longer considered to be. According to Figure 4, this sector lost 6,100 jobs between 2002 and 2013 in the Richmond MSA. If the sector would have grown at the overall national growth rate, it would have increased by 1,780 jobs. Because the sector decreased nationally and the industry mix effect was a decrease of 5,131 jobs, the MSA lost 2,749 jobs due to local shift effect, which means that there is both a national and regional decline in this Employment Sector. Therefore, the loss of this “export base” to the Richmond MSA was not caused by a local disadvantage, but rather a declining national industry problem, and makes it a lower priority retention target.

Financial Activities is the only sector who maintained a highly relative concentration between 2002 and 2013, and an LQ value that is considered to be an export base. The Financial Activities sector had an increase by 1,100 jobs in the Richmond MSA from 2002 to 2013. If this sector had grown in Richmond at the overall national growth rate of 4.4% from 2002 to 2013, it would have increased by 2,052 jobs. The industry mix effect was a loss of 2,498 jobs. The MSA gained 1,546 jobs which is classified as the local shift effect, meaning this particular sector in Richmond is outperforming national trends and is a current strong performer with many local strengths.

The following industries are considered strong performers (industries that are growing locally and exceeding growth elsewhere): Financial Activities; Wholesale Trade; Retail Trade; Financial Activities; Education and Health Services; Leisure and Hospitality; Other Services; and Government. The following industries are considered lagging performers (industries that are growing locally but at a slower rate than elsewhere): Professional and Business Services; and Transportation and Utilities.There are no industries in the Richmond MSA considered constrained performers (industries that are declining locally but not so rapidly as elsewhere). The following industries are considered poor performers (industries that are declining locally in both absolute and relative terms): Mining, Logging, and Construction; Manufacturing; and Information.

The Financial Activities sector in the Richmond MSA is a local industry specialization that is also a strong performer. This means that this particular industry has been able to develop a strong presence in the local area and has continued to thrive there. This sector represents the Richmond MSA’s current strengths and follow-on investigations should be done to consider ways to enhance factors that contribute to this industry’s competitiveness. The following sectors: Wholesale Trade; Retail Trade; Education and Health Services; Leisure and Hospitality; Other Services; and Government, represent non-specialization strong performers, or potential emerging industries. The significance of these sectors should be evaluated. The Professional and Business Services sector and the Transportation and Utilities sectors are growing due to larger economic/industry trends rather than local competitive advantage. Because there is an absence of improving competitiveness, the local prospects for these industries are more than likely limited. They are a lower priority target for development attention, unless there is a good reason to think that local competitive performance can be turned around. The Mining, Logging, and Construction sector, the Manufacturing sector and the Information sector appear to offer little leverage for stimulating economic growth in the Richmond MSA.

The drawbacks of the methods used above help to focus attention on a small set of local industries. However, the performance criterion used to identify these target industries is employment growth, which ignores all other just as relevant data that also evaluates industry performance (such as sales, earnings, or investment numbers). The time frame in this type of analysis is crucial as well. Selecting a different ending year could potentially change performance indicators due to fluctuations in growth rates above and below the national rate changing so frequently in some areas. Data disclosure problems also has the potential to hinder this type of analysis.

Works Cited

McLean, Mary. Understanding Your Economy: Using Analysis to Guide Local Strategic Planning. Chicago, IL: Planners, American Planning Association, 1992. Print.

"Understanding Shift Share - EMSI | Economic Modeling Specialists Intl." EMSI Economic Modeling Specialists Intl. N.p., 05 Dec. 2011. Web. 05 Nov. 2015.