December 2, 2013 by Emsi Burning Glass
Driver industries are those that play a key role in the economic vitality of a region by supplying quality, often high-paying jobs while also supporting job growth in other industries. These industries function as the primary engines for economic growth and stability because they export products and services and import vital dollars. Those dollars then circulate in the economy and support other local industries and jobs.
Every regional economy has at least one driver industry, and regions with strong, growing economies typically don’t rely on just one industry or cluster to drive all of their economic or employment growth.
In this post, we’ll walk through some of the beginning steps of using data available in EMSI’s Analyst tool to identify driver industries in your region. As always, it’s important to apply local knowledge when pinpointing driver industries. Also locating the businesses that make up these industries — something EMSI can provide with our business-level data from Infogroup — is a great complement to this analysis.
We’ve outlined a few metrics, some basic and some advanced, that are helpful to keep in mind when determining driver industries. This is by no means a comprehensive list, but it forms a strong starting point for any analysis:
Note: We used industry size, concentration, and average earnings to determine industry drivers for the largest 100 metros in our recent interactive map. A screen capture of Pittsburgh’s key industries is shown above, and we’ve used Pittsburgh as an example throughout this piece.
One of the most basic ways to gauge the importance of an industry is to ask a simple question: how many people does it employ? While not the last word on an industry’s importance, it’s a great place to start.
However, just because an industry is one of the largest sources of employment in a region doesn’t mean it’s a driver industry. For example, limited-service restaurants or grocery stores are large sources of jobs in almost every reasonably populated area, but they offer low-paying jobs and have small multiplier effects. Other industries, like health care and government, might be huge but don’t bring in outside money.
Location quotient, a measure of regional concentration, helps us understand the industries that are unique to a region. And it helps identify the most export-oriented industries in a region.
It’s one thing, for example, to say that commercial banking accounts for more than 21,000 jobs in the Pittsburgh metro. Pittsburgh is a large metropolitan area. Commercial banking is a ubiquitous industry. What does this mean?
It’s more helpful to say that commercial banking is two times more concentrated in Pittsburgh than the national average. In other words, the share of total employment that commercial banking makes up in Pittsburgh (1.8%) is twice that of the national share for the industry (0.9%).
LQ helps us benchmark industry presence in a region. In Pittsburgh, commercial banking is an important industry; an industry driver, we could argue. But it’s not nearly as unique to Pittsburgh as as iron and steel mills and ferroalloy manufacturing (NAICS 33111), which is nine times more concentrated there than the nation.
Shift share helps us determine if the industry growth we’ve seen in a region is due to trends in the industry nationally and in the national economy, or if that growth is due to special, regional factors. To put it another way, shift share helps answer why employment is growing or declining in a regional industry.
What does this have to do with isolating industry drivers? Shift share basically shows industries at the regional level that are outperforming the rest of the nation. These are industries to boast about because they’re thriving where other regions are struggling.
Let’s go back to our commercial banking example in Pittsburgh to illustrate this. Not only is the commercial banking industry twice as concentrated in Pittsburgh than the national average, it’s also grown much more than we’d expect given national trends.
From 2009 to 2013, commercial banking was expected to lose 116 jobs in Pittsburgh, mostly because employment industrywide across the U.S. has been fading. But it actually gained 1,880 jobs over that time in Pittsburgh, a 10% increase. That gives the metro’s commercial banking industry a competitive effect of 1,996 (an expected change of -116 plus an actual job change of 1,880).
It’s pretty simple: high-earnings industries contribute more significantly to the economic prosperity of an economy than low-earnings industries. Thus, we recommend including an average earnings baseline in any industry driver analysis.
In our industry driver interactive map, we used a baseline of $40,000 for average earnings per job, with most selected industries offering much higher earnings. However, be mindful of key industries that pay below this threshold and metros with lower-than-average overall industry earnings. For example, in Bakersfield, Calif., crop production is a major industry but only pays $38,000 per job on average.
When dipping into more advanced industry driver analysis, we’ll focus on data that comes from EMSI’s input-output model. It’s important, then, to use a “functional economy” as your region because exports, supply chains, and other similar data elements only make sense when a region is properly defined.
What’s an example of a functional economy? MSAs are typically good choices, as they constitute counties which typically all do business together.
It’s also important to have a good grasp of economic base theory. By taking into account key industries and their multiplier effects, rather than simply total jobs by industry, you can get a much clearer picture of the importance of various sectors in your economy. This is beneficial for economic developers deciding which industries to focus on (see our EMSI for Economic Developers series), as well as for workforce development and higher education professionals who want to know the key industries in their region, and by extension the key occupations staffing those industries to help determine where training dollars should go.
Discussion of economic base hinges on the difference between “basic” and “non-basic” industries, since the economic base is made up of contributions from basic industries only. Basic industries are those that export products and services, generating income from outside the region. Non-basic industries are those that generally support or sell to residents and businesses that are already in the region. Economic development traditionally focuses on basic industries.
One last note: Just like for the basic industry data metrics, the following elements are best used together. Looking at exports alone will tell you one thing really well, but usually we’re looking for more than that.
Exports show us dollars that have entered a region as a result of an industry exporting goods or services. This is a key metric, and supporting export-oriented industries helps increase the amount of money flowing into a region.
As we mentioned above, location quotient can also indicate an export-oriented industry. If an LQ is significantly higher than 1.0, this usually indicates that industry is a basic industry and thus helps bring new money into a region.
Using EMSI’s input-output tool, we can show the number of jobs currently dependent on a particular industry in a particular region. This is the number of jobs that, if we were to erase this industry from the economy, we’d lose as well.
Why is this important? It indicates that this industry supports not only jobs just within its industry category but also many jobs in an extended supply chain, and in the general economy. An industry with a strong (local) extended supply chain has deep roots in a regional economy. Supporting this industry reaps extensive benefits.
Let’s again look at commercial banking in Pittsburgh as an example. Earlier we established that this industry is strongly concentrated in the region and adding more jobs than expected. But our IO model also shows it has a jobs multiplier of 3.53, meaning it leads to 2.53 jobs for every one that’s created in Pittsburgh. These extra jobs are in industries that directly and indirectly supply commercial banking, as well as industries that benefit from the earnings that enter the economy as employees spend their paychecks in the region on food, clothing, and other goods and services.
This is much along the same lines as the jobs supported by the industry. But instead of showing the impacts in terms of jobs, we can look at how the sales and earnings in an industry leads to additional sales or earnings (or dollars) in a region.
For commercial banking in Pittsburgh, the earnings multiplier is 2.53 (so every dollar of new earnings yields $1.53 in additional earnings in the metro area) and the sales multiplier is 1.94.
We mentioned earlier that an industry with a strong extended supply chain has deep roots in a regional economy. With Analyst, we can easily derive the industries that exist in the supply chain for any industry.
We get to the supply chain by following the money; each industry buys goods and services from many other industries. By tracing the industries where commercial banking in Pittsburgh is spending its money, we can find which industries it buys goods and services from. The following table shows the industries commercial banking relies on to function, and how much of these industry requirements are satisfied inside the Pittsburgh metro.
|NAICS||Industry||Amount Spent by Commercial Banking||In-Region||Out of Region|
|523110||Investment Banking and Securities Dealing||$204,883,370||35%||65%|
|522292||Real Estate Credit||$87,437,562||83%||17%|
|551114||Corporate, Subsidiary, and Regional Managing Offices||$65,934,996||81%||19%|
|Source: EMSI Input-Output Model (2012)|
Why is this important? It’s helpful to understand the supply chain of key industries in your region so you can support them, or help attract firms in industries that cut down on the dollars leaving the region to suppliers that aren’t in your area. If an industry can’t buy what it needs in the region, it buys what it needs from outside of the region, which means that money has left the regional economy. Economists call this “leakage.” A good bit of leakage is unavoidable, but it’s a good idea to target the gaps in industry supply chains to see where those leakages can be avoided.
The bottom line: the more in-region commerce happens around driver industries, the less money driver industries spend outside the region, and the greater effect those export dollars have in the region.