Certain phrases pop up over and over again in economic analysis: clusters, economic base, maybe shift-share analysis. But what exactly do these mean?
Cluster analysis is a way to identify industries that have a strong concentration in a region. To identify a cluster, we use something called a location quotient, a number that shows how many jobs there are in an area relative to a comparison area. All location quotients are relative: the method compares the concentration of employment between two locations: for example, the jobs in the lumber industry in Itasca County, Minnesota compared to Minnesota overall. If the number is greater than one, the community has a stronger concentration in an industry than in the comparison region. Less than one and it’s less of a strength.
These numbers can be telling, but just because an industry has a lot of jobs doesn’t mean it’s actually a cluster. For example, health care is the leading employer in most communities, but the extent of that concentration relative to everything else can be very different. Meanwhile, an industry like transportation is probably never going to dominate the top of employment lists, but a concentration in it can be critical to a regional economy. Location quotients let us pick out the industries that truly rise to the top.
A shift-share analysis takes the location quotients a step further and looks at how the clusters have changed over time. Graphing the change over time and the location quotient creates a four-quadrant graphic that allows us to separate industries into four categories: growing base (growing and highly concentrated), transforming (shrinking and highly concentrated), emerging (growing but not highly concentrated), declining (shrinking and not highly concentrated). The implications of the analysis will vary, but the general message is always the same: concentrate on strengths and growing opportunities, and find ways to either shore up or help workers transition away from careers in the areas in decline.
The economic base, therefore, is a measurement of the industries that form the core of a community’s economy in terms of the number of people they employ. They bring wealth into a region by “exporting” goods or services to another region, thereby adding wealth to the local economy. Industries in a region outside the economic base, on the other hand, aren’t meeting the local need, so the region needs to import those goods and services from the outside. When we know an economy’s base, we know the strengths it can use to market itself for future growth, and where there might be holes that could be filled locally.
An off-the-shelf analysis will stop there, and will give a sense of where an economy stands. At Northspan, though, we recognize that it takes more than a report to create lasting change. That’s why we pair our data with facilitated community conversations, concrete recommendations, and long-term commitments to the communities we serve, as in this recent example in Sandstone. Contact Northspan Research Director & Consultant Karl Schuettler at email@example.com to learn more!