Community Economic Analysis Tools

These examples are taken from Community Economic Analysis, A How To Manual, Hustedde, Shaffer, and Pulver, North Central Regional Center for Rural Development, Iowa State University.

Overview

• Location quotients
• Employment multipliers
• Income multipliers
• Potential sales estimates
• Population/employment ratios
• Reilly’s Law
• Trade area capture
• Pull factors
• Shift-share analysis

1. To determine a community's degree of self-sufficiency in a particular retail or trade sector.

2 To determine if a community is losing its local trade dollars to non-local markets.

3. To determine if a community is producing more than needed for its own use and is selling the excess to non-local markets, i.e., identify export activity.

1. The Standard Industrial Classification (SIC) Code for Sector J, (i.e., apparel and accessory stores). First, define the type of business to be investigated in terms of its Standard Industrial Classification (SIC) Code. These codes are published by the U.S. Department of Commerce and Labor. The local Job Service is likely to have a copy. Generally, three-digit SIC codes should be used to determine location quotients but usually is unavailable in smaller communities.

2. The percentage of local labor force employed in Sector J, e.g., apparel and accessory stores. This percentage is determined by dividing the number of local people employed in Sector J by the total local employment. This employment information is available from the Job Service or Department of Labor or County Business Patterns. It is categorized in terms of SIC codes.

3. The percentage of workers employed nationally in Sector J, (e.g., apparel and accessory stores). This information is available through Job the state Department of Labor. Another source is the Employment Earnings report published by the U.S. Bureau of Labor Statistics. County Business Patterns is also a potential source for state or national data.

Location quotients are calculated by dividing the percentage of those employed locally in a particular sector by the percentage of those employed in the same sector nationally.

Looking at Riverside again, the Standard Industrial Classification (SIC) code for retail apparel and accessories is 56. In 1982, 1.38 percent of national employment is found in SIC code 56. Riverside has 1.29 percent of its 1998 employment in SIC 56. The apparel and accessory location quotient for Riverside is:

A location quotient less than 1 suggests the community is not self-sufficient and may be able to supply locally what it previously imported. To make this judgement requires comparing location quotients among similar communities, plus examining the population-employment ratios and eventually doing feasibility studies.

 EMPLOYMENT MULTIPLIER

1. Location quotients for the major employment sectors in the community (see section on location quotients)
2. Employment in the community by sector is available from the State Department of Labor or Job Service.

For simplicity, let us say Riverside has a two-sector economy. One sector is manufacturing and the other is trade. The information we need is:

The next step is to determine the percentage of each sector serving non-local needs. The formula for determining that percentage is:

equals the percentage of the community economy serving non-local needs. This is only computed for sectors with a location quotient greater than one (1), sectors with a LQ less than one (1) are assumed to serve only local (non-export) markets.

The employment multiplier is the total employment divided by the employment serving non-local needs, i.e., export.

 INCOME MULTIPLIERS

How to Calculate the Income Multiplier

MPC_L means the portion of people's income that is spent locally. The community of Riverside is within easy driving distance of a major regional shopping center. Thus, many items are purchased outside the community. In addition, there are many in-commuters to the city who spend much of their income where they live rather than in Riverside. The estimate is only 35 percent of people’s income is likely to be spent in Riverside. Hence, the MPC_L is .35.

The next question to ask is what proportion of local spending becomes local income? That is PSY in the formula. If local spending is for services such as restaurants, taverns, auto repair shops, and other types of labor intensive businesses the PSY may be as high as .50 to .60. However, if people spend the majority of their income on purchases with little local labor content (such as automobiles), the PSY may be as low as .25 etc,. Let us say the PSY is .45. Plugging the numbers into the formula our income multiplier is:

The income multiplier for Riverside is 1.18.

If the PSY is higher, e.g., .60 and the MPC is higher, e.g., 0.50, the multiplier becomes

Interpretation

The income multiplier of 1.18 suggests the total income change from the prison development is slightly greater than the prison's gross payroll. It means that for every prison payroll dollar, there will be a change of $1.18 in local income. The interpre- tation is similar for the multiplier of 1.43. The important point is the size of the multiplier is sensitive to estimates of MPCL and/or PSY.

 POTENTIAL SALES

1. Actual retail/service sales for a particular activity is collected from the Census of Retail Trade or Selected Services for selected years or possibly from sales tax date.
2. Trade area population is estimated from Reilly’s Law and the Census of Population.
3. State average expenditures per person for a particular retail/service activity can be collected from the appropriate Census of Business or sales tax data.
4. State and local per capita income data can be collected from Bureau of Economic Analysis data or state income tax data or Census of Population.

The formula is:

For the City of Riverside, the following data is used in the above formula: trade area population, 22,500; local per capita income, $5,539; state per capita income, $6,864; and state per capita auto sales, $655.61.

The proportion of potential sales that are captured are:

 Interpretation

 POPULATION-EMPLOYMENT RATIO

1. Population of each community. The population of the three or four communities to be compared with the community. Annual population estimates are available from state agencies such as the Department of Administration or the Department of Revenue. Precise figures are available for census years, i.e., 1980 and 1990 from the Census of Population.
2. The number of local workers in a particular sector, defined by SIC code. The number of local workers in each sector, i.e., SIC code 56, apparel and accessory stores, is available from the State Department of Labor or Job Service.

The population of a particular city or village divided by the number of people employed in a particular trade or service sector in that city yields the population-employment ratio.

The following data are needed to compute the ratios:

City	Population	Employment in Apparel and Accessory
Riverside	7,052	224
Forest Grove	6,758	123
Booneville	7,826	175
Mountainview	3,246	71
Porterville	7,833	108

Riverside population-employment ratio:

Forest Grove population-employment ratio :

Booneville, Mountainview, and Porterville have population-employment ratios of 44.72, 45.69, and 72.53, respectively. The next step is to compute the average, which is 49.36.

Interpretation

On the average, each retail apparel store worker "sells" to about 50 people. However, in Riversi4e each retail apparel store worker only sells to about 29 people. Why does Riverside have such a low population-employment ratio? It could be because the local merchant is aggressive and is servicing a much larger nonlocal market, or the local merchant is over staffed. In any case, the population-ratio here does not suggest any room for expansion. This agrees with the location quotient analysis.

1. Population of each city to be compared with our community, e.g., Riverside. Each state generally makes annual estimates of community population for various official purposes. Contact the local community or call a state office, such as the administration department or the sociology department of a nearby university for this information.

2. The road distance from our community, e.g., Riverside to similar cities surrounding it, e.g., Mountainview, etc. The distance between communities can be read from road maps.

Compute the boundary between Riverside and Mountainview by plugging the numbers into the formula.

Compare Riverside and Centerville by using the same formula:

After the trade area has been identified the population, income, and other information about municipalities within the trade area can be used to help Riverside merchants to understand their trade potential.

TRADE AREA CAPTURE

1. Actual retail sales in a particular sector, i.e., Riverside auto sales in 1993 and 1998. The retail sales for the community and the state are located in the Census of Business. This information is published every five years, i.e., 1992, and 1997. If you are analyzing a community larger than 2,500 people, you can obtain up-to-date retail sales information from private sources such as Standard Rate and Data or Sales Management. These are often available in newspaper offices, larger retail firms or libraries in universities, and business colleges. In some states, sales tax data can be used. This can be obtained from the appropriate state agency.
2. State per capita expenditures in that particular sector, i.e., state auto sales in 1993 and 1998.
3. County per capita income for the years being analyzed, i.e., for 1992 and 1998. Per capita income is available from various state agencies such as the Department of Revenue or Department of Administration or Census of Population or Bureau of Economic Analysis Regional Economic Information Program.
4. State per capita income for same years as local income, i.e., for 1993 and 1998.

* Includes categories not explicitly identified.

PULL FACTOR

1. Trade area capture for a particular sector for two time periods, i.e., Riverside auto sales trade area capture for 1993 and 1998.
2. Population of the community, i.e., Riverside population in 1993 and 1998. Annual estimates of the community population are available from the local library, city hall, or a state agency such as the Department of Administration or Department of Revenue.

To calculate a pull factor for a certain type of retail good, divide the trade area capture estimate by the community population for the same year as the trade area estimate:

Riverside's population was 6,545 in 1993 and 7,065 in 1998. Its trade area capture for auto sales was 10,446 in 1993 and 17,680 in 1998.

A pull factor less than one suggests the community is not even capturing the shoppers within its municipal boundaries or they are spending relatively less than the state average.

To measure how many new jobs were created locally due to national economic trends.

The community of Riverside has four sectors and wants to know if recent employment changes were due to national economic trends or other forces.

1. Workers employed in each sector both nationally and locally for at least two years. First, locate the SIC code of the industry or sector you want to study. This data is available from the U.S Department of Labor or Commerce and can be found at many libraries. The most accessible source is County Business Patterns. You need to compare data for two years. For example, you might want to compare the number of workers in 1980 and 1982 in a certain sector, e.g., SIC code 37, transportation equipment manufacturing. The number of workers employed locally in the same SIC and years you identified nationally is available from County Business Patterns which is published annually. Again, you will need data for two years. The State Department of Labor and Job Service can also be helpful in locating this information. Also, be sure to use data from the same sources to reduce potential error from differences in how the data was collected.

Here is how the Riverside data looks:

The national growth component is calculated by multiplying the base year employment (1980 in our example) by the national average employment growth rate. The sum of the products is called the national growth component.

INDUSTRIAL MIX COMPONENT

The industrial mix component is computed by multiplying the local employment in each economic sector by the difference in the national growth rate for that sector and the whole economy.

The competitive share component is calculated by multiplying the local employment in each economic sector by the difference in the growth rate for that sector nationally and locally. The results for each sector are summed up to give the community's competitive share. The Riverside case illustrates how to compute competitive share.

140 = 84.88 + (-47.65) + 102.92 = 140.15

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October 21, 2003