Transcript Economic Base Analysis

Fanning (2005), Ch 6
Economic Base Analysis
Interpreting Local Employment
Numbers
What is the Economic Base?
• Economic Base: Activities that bring income
into a city
– Export activities: Products or services provided
to the outside world (most manufacturing; higher
education and research, advanced health care)
– Activities that attract money (retirement, tourism)
• Secondary (Local) Activities: Activities that
recirculate income in a city (local government,
local merchants and services)
Economic Base Multiplier
• The idea: As goes the base, so goes
the city. One extra job in the basic sector
may cause 3 extra non-basic jobs.
• Multiplier effect: Base income is respent,
producing additional income
The Economic Base brings money In
5. Total community income
is the sum of export dollars
plus respent dollars
1. “Exports” bring dollars
into the community
2. Most is respent
$$$$$$ on local goods
and services
Savings
$
$
4. Some “leaks”
into savings
$$
$$$
$
$$$$
$$$
$
$
3. Some “leaks”through outside expenditures
The Economic Base Multiplier
• The multiplier is total employment divided by
basic employment.
• I.e., divide total employment into basic and
nonbasic: T = B + NB
• The multiplier: k= T/B. E.g., k=3.0
• Estimate future growth in basic employment
= cB. E.g., 5,000 new workers
• Then est. growth in total emp = kxcB
• E.g., est. cT = 15,000 = 3.0x5,000.
Examples of Basic Employment
• Mining and extractive industries – oil in
Houston
• Manufacturing – cars in Detroit
• Federal government – military bases in
Norfolk.
• State and local government – state
university or hospital
• Retail & financial services that attract
customers – major mall in a rural area.
Nonbasic (“Service”) Employment
• Local professionals – attorneys, doctors,
real estate brokers, appraisers, lenders
• Most retailing – gas stations, grocery
stores, etc.
• Local construction workers
• Local government workers – school
teachers, city hospital employees, etc.
Obtain employment data
• Quick Indicators
– USA Counties in Profile
http://www.stats.indiana.edu/uspr/a/us_profile_frame.ht
ml
• See next slide for how to use Census
data for EB analysis:
– U.S. Census Detailed Tables
http://www.census.gov
Location Quotient an Indicator
of Economic Base
• Compute the percentage of total employment in a
given industry
• Example: Suppose education is 20%
• Compute the same percentage for the national
economy
• Suppose education in the national economy is 9%
• Compute the ratio of local to national percentage:
• Location quotient = 20% ÷ 9% = 2.22
• Interpretation: Local economy has 2.22 times the
normal education employment; excess is export
employment
Limitations of Location Quotients (LQ’s)
• They assume that:
– Consumption patterns are constant from one local
(e.g., metropolitan) area to another.
– Labor productivity is the same in all metro areas.
– Each industry produces a single homogeneous good.
• The net result of these assumptions is that
location quotients usually underestimate basic
employment.
• However, the LQ method is simple and data are
readily available.
Supply Factors Affecting a
Community Economic Base
• Labor force characteristics
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Special skills and experience
Education level
Unionization
Work ethic
Other?
• Quality of life
• Leadership
– Financial support
– Government support (subsidies, land use regulation)