When preparing regional economic plans, tools that help structure data for evaluation are always helpful. Two of the more common and useful tools are shift-share analysis (SS) and location quotient (LQ) analysis. The first tool enables planners to determine where change in any one location’s demographics, employment and/or income stream is coming from. The second tool provides a means for planners to quantify the importance of a business sector or demographic group in a given location, explaining just how unique that location is when compared to any other location. A short explanation of each analysis technique follows.
Shift-share Analysis assumes growth or decline in any one business sector can be measured and explained through examination of three (3) factors, these being national share, industrial mix, and local share, also termed “competitive share”. And when combined in a single analysis, the three factors help the viewer determine just what is motivating local employment growth.
- The National Share basically measures how much growth in local employment is attributed to growth in the national economy. For example, if the national economy grew by 2.0%, then the logical expectation is the local economy should as well. The resulting number of 2.0% times a location’s base employment produces the number of jobs directly attributable to national trends.
- The Industry Mix compares each business sector (e.g., manufacturing, retail, wholesale) at the national level against the overall national trend. In so doing, it determines whether or not each national business sector grew at the same rate the overall national economy (e.g., 2.0%) did over the time period being examined. The resulting percentage is again applied to the base employment of each local industrial sector to determine how many jobs each can claim they produced. The overall sum of those numbers then generates the impact of a location’s Industrial Mix.
- The Local or Competitive Share is perhaps the most important of the three components. ‘Local” is also a relative term in that it can refer to state, region or county-level employment. No matter what level of information used, the Local or Competitive share reveals just how impactful local decisions and investments are having on local business growth. It compares local sector growth against national sector growth across the industrial spectrum, providing a measure of each local sector’s competitive standing in so doing. If a local sector grew at a faster rate than its national counterpart, then that sector is competitive. This is particularly important when one evaluates private or public growth strategies since both impact a sector’s competitive stance.
Location Quotient Analysis is a straight forward means of identifying the strongest and weakest sectors of a location’s economy. It basically seeks out which business sectors are the most concentrated by comparing an industry’s share of regional employment against its share of national employment. An Index in outcome, 1.oo is seen to be average. Anything amount above that figure means the industry selected is more stronger locally than its counterpart is nationally. Anything greater than 1.25 is generally seen to be a major component of the local economy and that a percentage of its workforce is producing products for export. Anything lower than 1.00 means the industry is not as strong as its national counterpart and that a percentage of products consumed locally are imports.
When used collectively, Location Quotient Analysis and Shift-Share Analysis can provide local economic planners with a solid base of information for future decision-making. Anyone wishing to gather and analyze their own information can find spreadsheet models of each analysis technique by clicking on “Resources” in the navigation line above and then going to “Analysis Tools”.
Those not wishing to go that extreme can find two (2) on-line models that can be used to produce an examination of local employment numbers. The models provided possess all of the data needed, asking the viewer only for the location and time frames to be examined. That for shift-share comes from The University of Georgia while that for location quotient is made available by the Bureau of Economic Analysis.
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