Econ. 3323Regional Analysis

Phase 2 – Economic Base Analysis

The objective of Phase 2 of the project is to identify and evaluate your region’s “economic base.” This task begins with the tabulation of 2-digit NAICS activities you did for Phase 1 (i.e., your equivalent to Table 2 in the Region X example).

1. Review the 2-digit NAICS summary table for your region. Note the percentages of total regional employees and payroll that each 2-digit activity group represents. Make up a new 2-digit table that includes only those activity groups that account for ten percent or moreof total employees or total payrolls (or both) in the region. (See Table 4, Part I, Region X example.)

Your region’s “economic base” will be found among these activities.

2. Whenever you calculate the percentage of total regional employment that a particular economic activity represents, you are calculating what is called, in regional analysis jargon, an “activity employment ratio” (AER). AERs are used to calculate “location quotients” (LQs) and it is the LQ value of an economic activity that is a key basis for deciding whether that activity is part of the region’s economic base.

The operations necessary to complete a location quotient analysis are best understood in terms of some simple equations. The first of these is . . .

AERir = Eir / Erwhere AERir means activity employment ratio for activity i in region r; Eir means total employment in activity i in region r; Er means total employment (in all activities) in region r.

Example: if Eir = 3,000 and Er = 20,000, then AERir = 3000 / 20000 = .15

Interpretation: the result, .15, means that 15% of region r’s total employment is in

activity i.

Note that the percentage figures for each 2-digit activity group in Tables 2 and 4 (Region X example) are really AERs, expressed in percentage rather than decimal form.

3. Now you need to get some comparison data for the activity groups that meet the criteria in 1, above. Specifically, you need the total employment in each of these activity groups in the state and in the nation, and you also need total employment in all NAICS activities in the state and nation.

For state data: in get into “NC State and County QuickFacts,” then click on “Browse data sets for NC”; next (under Business Quicklinks) click on “County Business Patterns Economic Profile 2007” You are now in a large table that shows total N.C. employment for 2003 (near the top – 3,586,552 employees) and then you can work down through the table to get total state employment in individual 2-digit activity groups; or there’s an alternative way to get these data, which we’ll discuss in class.

For U.S. Data: on the page click on “Business & Industry” and under “The Economic Census” click on 2007; then scroll down in the box to 2007 Economic Census and click “Advance Summary Statistics for the U.S. . . 2007”. This puts you into a table from which you can get national employment in individual 2-digit activity groups

For U.S.grand total employment data:National total employment for the year 2007was estimated at 137,598,000. Use this figure in your analysis.

Source:

Once you have the relevant state and national numbers in hand, you can calculate state- and national-level AERs for each activity you are analyzing.

  1. State-level AERs for each activity are calculated as

AERis = Eis / Eswhere AERis means activity employment ratio for activity i in the state; Eis means employment in activity i in the state; Es means total employment in the state.

  1. National AERs for each activity are calculated as

AERin = Ein / Enwhere AERin means activity employment ratio for activity i in the nation; Ein means employment in activity i in the nation; En means total employment in the nation.

Example: if Ein = 12.0 mil. And En = 140 mil., then AERin = 12.6 / 140 = .09

4. Now you are ready to calculate location quotients for the activities you identified in 1, above.

  1. State-level LQs are calculated as

SLQir = AERir / AERiswhere SLQir means state LQ for activity i in region r.

  1. National-level LQs are calculated as

NLQir = AERir / AERinwhere NLQir means national LQ for activity i in region r.

Example: The NLQir based on the previous example calculations is .15 / .09 = 1.67. Interpretation: The LQ of 1.67 means that, proportionally, employment in activity i in region r is 67% greater than employment in activity i in the nation as a whole.

Make up a table that shows the relevant employment numbers, AERs, and LQs for your “economic base candidate” activities. (See Table 4, Part II, Region X example.)

How do we use location quotient numbers? Before addressing this question directly, we need to review and qualify some venerable regional economic theory.

In regional economics, the traditional theory was that a region’s “economic base” was composed of those activities that utilized its natural resources (i.e., agriculture, forestry, fisheries, mining), along with manufacturing activities with relatively high LQs. The reasoning was that these activities produced products in quantities that exceeded consumption needs within the region and thus the “excess” production was sold outside the region. This “export” of products generated income to the region’s resource suppliers and business owners, and it was this income, in turn, that allowed local trade and service activities to thrive. That is, natural resource utilization and manufacturing provided the “economic base” that brought income into the region from outside sources, while trade and service activities within the region were viewed as mostly serving local consumers’ needs only.

The proposition that trade and service activities mostly serve local needs and thus are logically not part of a region’s economic base may have been valid in former times, but is of doubtful validity in our modern economy. For instance, consumer products are marketed nationally via television and the internet, and financial services that once could only be obtained by face-to-face dealing with a local banker or broker are now easily done via telephone or internet. The point is that today virtually any economic activity that occurs within a given region may, under certain circumstances, bring substantial income into the region from outside sources, and thus may be part of the region’s economic base. Given this point, the appropriate use of the location quotients you get for activities in your region is as follows.

5. Review the LQs you got for your 2-digit activity groups. Note any instances in which you got state or national LQs greater than 1. These activities have a greater than average level of employment in your region (compared with the state or nation) and thus are likely producing products sold outside the region. If so, then these activities are contributing to the region’s economic base, in the sense that they are bringing income to the region from outside sources.

  1. Make a set of tables that include those activities that have a SLQ or

NLQ >1. These are your region’s economic base activities.

B. Now go back into the 2007 County Business Patterns tables for your counties (see page 4 of Phase 1 outline); scroll to your first economic base activity and click on Detail. Examine the list of 3-digit level activities and list the NAICS codes, descriptions, number of employees, annualpayrolls, and number of establishments for these activities under their 2-digit groups (see Table 5a, Region X example).

In doing this, don’t feel compelled to record every 3-digit activity than may be listed – any with very few employees and insignificant payrolls may be ignored. A good rule of thumb to use is to include all 3-digit activities that account for 5% or more of total employment in the 2-digit activity for the region.

B. Repeat A for additional economic base activities you have identified – do not proceed further until you have compiled 3-digit detail data tables for all of your economic base activities.

Dealing with letter codes: When you get into the 3-digit activity tables, you are probably going to encounter letter codes for some of your activities. These codes are there, instead of the actual numbers, because the Census Bureau cannot legally disclose information for individual (or small numbers of) enterprises.

There are two types of letter codes you may encounter: (1) employment size class codes – these range from a to c and e to m, each denoting a range of number of employees for the activity in question. In the absence of more reliable information about the actual number of employees in the coded activity, we will use midrange estimates of employment for these activities. For convenience, a table of these estimates is provided between tables 4 and 5 in the Region X Example Table 2 file.

(2) The other letter code you may encounter is a “D” code for annual payroll for some activities. When this code is encountered, we can use payroll data from other counties in the region or, if necessary, state-level payroll data to estimate total payroll in the activities in question. (We will discuss this further in class.)

6.Now start another set of tables (I know, I know). (1) To begin, create a new Excel table with the title format you see for Table 6a, Region X example – i.e., copy the first eleven (11) rows of the example Table 6a into a new excel worksheet. (Be sure to change the title to describe your region and first economic base activity!) (2) Next, copy the entire field that contains your 2- and 3-digit economic base data from Table 5a into Table 6a, starting in cell A12 in Table 6a.

Now you are set up to get important data for your 2- and 3-digit economic base activities for key earlier years.

7. Get onto and work to the 2007 County Business Patterns page for

your first county. Now select the year 2002and click GO. Then scroll to your first 2-digit economic base activity and record the employment, annual payroll, and establishments data for it. Next click Detailand begin recording the relevant 3-digit activity employment, annual payroll, and establishments data for the activity for year 2002.

Repeat the above procedure for your other counties and economic base activities for 2002.

Then do the same tedious job again for the year 1998.

8. Once you have compiled the county-level data for 2007 and 1998, enter them in the appropriate cells in Table 6a. Next enter employment estimates information wherever needed; then make any payroll estimates needed.

At this point you should have only two sets of rows to complete in this part of Table 6a. These are (1) regional total employment, annual payroll, and establishments for each 3-digit activity and (2) % of (activity) Total for each one. You may use Excel functions or calculation and direct entry to fill in these rows, whichever is easier in any particular case.

9. You are going to hate me for this, but there’s one more section to be added to Table 6. This section shows the percentage changes in the values of the economic variables between 2002 – 2007 and 1998 – 2002. The format for this isin the bottom portion of example Table 6a. Believe it or not, it’s pretty easy to do all of this via Excel functions (I’ll demo how to do this in class).

We will do a detailed 2002 – 2007 and 1998 – 2002 data comparison in Phase 3. Right now, compare the 1998 – 2002 and 2002 - 2007employment,payrolland establishmentsdata for each of your 2-digit activities onlyand in your report note whether each activity has declined, grown, or held steady over the periods, as indicated by the % changes in these variables.

10. Agricultural production: Since most farm products produced in given counties in N.C. ultimately are sold to outside markets, we can comfortably argue that significant agricultural production in any small region of the state is an economic base activity.

With this in mind, check the total value of farm receipts for your region (from Phase 1, Table 3) to verify whether this figure compares with total regional payrolls for any of your economic base activities at the 2-digit level. If so, then note this as verification that agricultural production is part of the region’s economic base. If not, note so briefly.

Example: In Region X, 2008 farm cash receipts were $200.9 mil.; this was greater than both Retail Trade ($163.5 mil.) and Accommodation and Food Services ($82.1 mil.). Since these two activities qualify as part of the region’s economic base and since income generated by farming was greater than payrolls in these two activities, I conclude that agricultural production is part of Region X’s economic base.

Organizing and Writing the Phase 2 Report

A. Get your ducks in a row: The following data / information is essential to your Phase 2 report.

  • Your complete 2-digit NAICS activity table (equivalent to Table 2, Region X example). I know you did this for Phase 1, but I want to see it again so I know your starting point.
  • Reduced 2-digit NAICS summary table (step 1, above; this table should be similar to Part I of example Table 4 for region X).
  • A table clearly showing your AER and LQ calculations for the 2-digit activities you have identified as potentially being part of your region’s economic base (see steps 2, 3, and 4, above; the table should be similar to Part II of example Table 4 for region X).
  • A set of tables showing the 2-digit activities that have SLQ and / or NLQ values > 1, along with 3-digit activities that appear especially important (step 5, above); this table should be similar to example Table 5a for region X – but remember that you will have a Table 5b and etc. to cover additional economic base activities.
  • A table showing the 2003 County Business Patterns and 2002 and 1997 Economic Census data for your economic base activities (i.e., those included in the table just above). See steps 6, 7, and 8, above; your table should be similar to Table 6a, region X example (upper portion); and you will have a Table 6b and etc. to cover additional economic base activities.
  • A table showing the 2002 – 2007 and 1998 – 2002 % changes in the 2- and 3-digit activities (step 9, above; this table should be similar to the lower portion of example Table 6a for region X).
  • An evaluation of whether agricultural production is an economic base activity (step 10, above).

B. Organize it and write it up:

  • The report you submit should follow the organization guidelines you are already (painfully) familiar with from doing the Phase 1 report. I.e., cover page, table of contents, text, references, appendix.

A few reminders: don’t neglect to subsection the text; be careful to cite information sources within the text and provide adequate source citations in the references section. Note source(s) of tables.

  • You may be torn about whether to include certain tables within the text or to put them in the appendix. Use your judgment re. which location will be most effective for each table; but remember that it is poor form to put large tables in the text.

I suggest you arrange your text as follows:

  1. First, briefly discuss what your reduced 2-digit NAICS table shows re. the economic activities that represent = > 10 percent of total regional employment or payrolls.
  2. A section discussing your AER and LQ calculations, and clearly stating what 2-digit activities you are judging to be the region’s economic base, given the results of the LQ analysis. Also, note any 3-digit level activities that you have identified as being especially important.
  3. A section that summarizes the 2007, 2002 and 1998data for your economic base activities and generally compares the 2002 – 2007 and 1998- 2002 data changes.
  4. Finally, a brief discussion regarding whether agricultural production is an economic base activity in your region.

For the “How much does he want (or how little can I get away with)?” freaks in the class: covering the text points just noted will probably take fourto six pages of written text (double spaced) – not including any tables incorporated into the text.

Dr. ZinnJanuary 2010

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