Planning Analysis:
Community Economic Analysis I

Introduction

Why should communities perform economic analysis?

To better understand the local economy and what economic opportunities and constraints exist. The national economy has undergone substantial changes in the past few decades, these changes also affect local economies. To further complicate the problem, local economies have undergone substantial changes that may or may not mirror national trends. As such, community economic analysis is useful in developing community economic strategies.

Historically communities focused on attracting industries, primarily manufacturing, as the cornerstone of their economic development strategies. That approach, however, should be supplemented with other economic development alternatives such as:

  1. Attracting new basic or export employers
  2. Capturing existing markets
  3. Encouraging the starting of new firms
  4. Helping existing firms become more efficient
  5. Utilizing aids and programs from broader levels of government

A wide variety of economic analysis tools can be applied to analyzing local economies. A more detailed description of those tools can be found the the class handout on community economic analysis.

Location Quotients

LQ can be used to distinguish the proportion of workforce serving local or non-local markets. That is, does a community produce more than is needed to meet local demand.

LQ > 1 = Export commodity

LQ < 1 = Import commodity

Location quotients are calculated using the following formula.

While location quotients are useful for comparing a local economy to a regional, state, or national economy, you should be careful in interpreting them. Not all communities should or need to be self-sufficient in all industries (competitive advantages). Moreover, location quotients work best for trade or service sectors. If communities

Q: Is it feasible to have this type of trade or service activity in this particular community?

Location quotients useful to compare your community to other communities…Can’t replace a feasibility study. To calculate the location quotients use industrial data by SIC---1, 2, 3, 4 digit SIC codes—can have net import at 1-digit code, but export at some 2–4 digit codes.

Example: City of Corvallis

What are the import/export industries for the City of Corvallis? Table 1 shows based on 1990 Census data.

Location quotients in Corvallis, By Sector,1990

Area

Location Quotient

Employment Sector

Oregon

Benton County

Corvallis

Corvallis/ Benton Co

Corvallis/ Oregon
Agriculture, forestry, and fisheries

66,730

1,892

696

0.60

0.68

Mining

2,479

54

5

0.15

0.13

Construction

74,206

1,215

511

0.68

0.45

Manufacturing, nondurable goods

61,873

1,070

601

0.91

0.63

Manufacturing, durable goods

171,335

4,235

1,990

0.76

0.75

Transportation

55,283

715

299

0.68

0.35

Communications and other public utilities

31,006

459

194

0.69

0.41

Wholesale trade

61,938

673

323

0.78

0.34

Retail trade

239,010

5,619

3,807

1.10

1.04

Finance, insurance, and real estate

78,671

1,338

819

0.99

0.68

Business and repair services

60,660

1,047

668

1.04

0.72

Personal services

40,768

823

588

1.16

0.94

Entertainment and recreation services

17,650

352

270

1.25

0.99

Professional and related services
Health services

103,623

2,107

1,228

0.95

0.77

Educational services

112,018

7,593

5,827

1.25

3.38

Other professional and related services

88,557

2,629

1,763

1.09

1.29

Public administration

54,113

1,163

717

1.00

0.86

Total

1,319,920

32,984

20,306

Source: 1990 U.S. Census, location quotients calculated by ECONorthwest.

Population-Employment Ratios

To measure the number of people in the local market per job in a particular trade or service sector. It is used to make inter-community comparisons of trade and service sectors.

High population/employment ratios and location quotients less than 1 suggest expansion possibilities.

Low population/employment and location quotients suggest limited expansion possiblities.

Example: Mid-Valley Communities Health Sector

Table 2 shows the population-employment ratios for the Health Services sector for selected Willamette Valley communities.

Table 2. Population-Employment Ratios for the Health Services Sector

City

Population

Health Service Employment

Pop/Emp Ratio
Corvallis

44,757

1,228

36.4
Eugene

112,669

4,127

27.3
Springfield

44,683

1,405

31.8
Albany

29,462

901

32.7
Salem

107,786

4,664

23.1
Average

339,357

12,325

27.5

Multipliers

Two types of multipliers exist: employment and income. Multipliers measure the interactions and linkages of the export sector and other households and businesses in the community. If there are no linkages (local purchases of labor, suppliers, materials, etc) then there are no multiplier effects.

Do they apply to all industries? No, just basic or export industries.

Types of employment multipliers:

Average Employment Multiplier = total employment in the community/export employment in the community

AEM is the average of all employment in export sector and represents the relationship between the export base and total economy at one point in time. To look at specific industries, you’ll need to use an input/output model.

Marginal Employment Multiplier = change in total employment/change in export employment

Problem: how to measure export sector?

Export sector is businesses that sell products in non local markets. Can be done by observation; difficult to do with standard data sources

Why is it important?

Multipler = 350/100 v 350/175

Multiplier = 3.5 v 2.0

Calculating Percent Export

Percent Export = (1 – 1/LQ) x 100

This is only used for businesses or sectors that have an LQ > 1.

EXAMPLE:

Sector Total Employment Location Quotient Percent Export Export Employment
A 50 2.00 50 25
B 5 0.75 0 0
C 40 4.00 75 30
Total 95     55

Emp Multiplier = 95/55 = 1.73

Gets most traditional exports (farming/forestry/manufacturing) and many non-traditional activities. Doesn’t do well with retirement income (can be considered a basic/export industry)

How can non-traditional activities be addressed?

By adding the number of Social Security recipients to export employment.

Income Multipliers

Local income multiplier = 1/ 1 – (MPCL X PSY)

Where:

MPCL = marginal propensity to consume locally (proportion of total income people spend locally) Usually ranges between .2 to .7; typical range .3 – .6

PSY = percentage of local money spent that becomes local income. Typically ranges between .25 and .75. Measures how much local labor, interest and profit are involved in the final price of a product. Restaurants – high, auto sales -- low

Examples:

MPC = .8
PSY = .75
LIM = 1 / 1 – (.8 x .75) = 2.5
MPC = .2
PSY = .25
LIM = 1 / 1 – (.2 x .25) = 1.05

What community characteristics affect multipliers?

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October 21, 2003