Fanning (2005), Ch 6Economic 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 goesthe city. One extra job in the basic sector may cause 3 extra non-basic jobs.

• Multiplier effect: Base income is respent, producing additional income

$$$$$$

Savings

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$

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The Economic Base brings money In

1. “Exports” bring dollars into the community

$$$$

2. Most is respent on local goods and services

3. Some “leaks”through outside expenditures

4. Some “leaks” into savings

5. Total community income is the sum of export dollars plus respent dollars

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.html

• 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– Special skills and experience– Education level– Unionization– Work ethic– Other?

• Quality of life• Leadership

– Financial support– Government support (subsidies, land use regulation)