context in ARCH INDIANA’S WORKFORCE AND ECONOMY M 2006 inside Location Quotients Location Quotients: A Tool for Comparing 1 Regional Industry Compositions A Tool for Comparing Regional Industry Compositions Manufacturing Counties—The Fallen 4 sk the average person on of Workforce Development economic the street to name the growth regions (EGRs) to Indiana’s Monthly Metrics: Indiana’s Economic 8 Indicators AMotor City and most will statewide industry composition. respond “Detroit”—except maybe Location quotients identify export Regional Perspective: Economic Growth 10 Region 3 in Indianapolis. Silicon Valley is industries in an area (those industries recognized as a leader in the production producing more of a good or service Midwest Business, Employment and Pay 12 Landscape of computer hardware, software and than is needed to meet area demand) information technology services, and import industries (those producing Inside the Data Center 15 while New York City is home to large less than enough to meet area demand). financial markets. Specializations or Following accepted economic theory, Indiana–U.S. Location Quotients concentrations of related industries an LQ greater than 1.0 indicates that According to 2004 data from the Bureau of Labor Statistics, Indiana has proportionally are a widely recognized economic an area has proportionately more more workers in four of the nineteen major phenomenon and play an important workers than the larger comparison area industry classifications when compared to the nation. Of those four, only manufacturing role in “branding” cities, regions employed in a specific industry sector. can potentially be classified as an exporter. and states. Location quotients (LQ) This implies that an area is producing For more details about location quotients and Indiana’s workforce regions, see the adjoining are used in research to quantify and more of a product or service than is article. compare concentrations of industries consumed by area residents. The excess Location in a particular area and are critical is available for export outside the area. Industry Quotients to understanding an area’s economic An LQ of at least 1.25 is required to Manufacturing 1.77 strengths and weaknesses. consider classifying an area industry as Utilities 1.14 Transportation and Warehousing 1.12 an exporter. Still, an LQ greater than Arts, Entertainment and Recreation 1.06 Location Quotients 1.25 does not necessarily mean that an Source: Bureau of Labor Statistics Location quotients compare an area’s area industry is exporting; there may business composition to that of a larger simply be excessive local demand. December Unemployment area (i.e., nation or state). In order to Identifying area export industries determine an LQ, a formula similar to (LQ > 1.25) is useful, as it provides Indiana’s December 2005 unemployment rate reached it’s highest point since the beginning the one shown in Table 1 is used. a measure of the degree of industry of the 2001 recession; peaking at 5.3 percent An LQ can be calculated for any specialization within an area. A high and surpassing the December 2001 level by 0.1 percentage points. Meanwhile, the nation’s industry where comparable data exist location quotient in a specific industry December unemployment rate dropped 0.8 for both areas. This article discusses may translate into a competitive percentage points from 2001 to 2005, down to 4.6 percent. regional economies within Indiana advantage in that industry for the local 8% and compares the Indiana Department economy. Economic development 7% Indiana United States 6% TABLE 1: LOCATION QUOTIENT EQUATION AND RULES 5% Value Implication 4% Regional Industry Employment 3% Area has proportionally more workers employed in a ( Regional Total Employment ( LQ > 1 specifi c industry sector than the larger comparison area Unemployment Rate 2% LQ = State Industry Employment LQ ≥ 1.25 Area industry has potential to be classifi ed as exporter 1991 1989 1993 1995 1997 2001 2003 1999 2005 ( ( December of Each Year State Total Employment May indicate opportunity to develop businesses in the LQ < 1 *Not seasonally adjusted local area A State & University Partnership for Economic Development Indiana Department of Workforce Development Indiana Business Research Center, IU Kelley School of Business opportunities may exist for additional businesses in the local area to meet area information to support regional growth of the exporting or related demand. planning efforts. As expected, different industries because of the presence of regions of the state have different an existing skilled labor pool or other Indiana’s Regional characteristic industries; but the resources such as suppliers, facilities or Industries statewide economy has long been transportation hubs in the region. Location quotients represent a good dependent on manufacturing. Despite An LQ significantly less than 1.0 starting point for understanding the job losses in this sector in recent years, may indicate an opportunity to develop regional economy and providing manufacturing industries appear among TABLE 2: TOP 3 JOBS LOCATION QUOTIENTS (INDIANA BASE) BY ECONOMIC GROWTH REGION, 2004 Economic 2004 Annual Jobs LQ Percent Job Growth Region NAICS Industry Average Jobs* (Indiana base) Gain/Loss Since 2001 324 Petroleum and Coal Products Manufacturing 1,817 5.11 -7.7% 331 Primary Metal Manufacturing 20,445 3.83 -26.1% 1 713 Amusement, Gambling and Recreation 10,101 2.65 0.8% 321 Wood Product Manufacturing 7,895 3.66 -9.0% 336 Transportation Equipment Manufacturing 38,573 2.56 28.0% 2 339 Miscellaneous Manufacturing 7,937 2.55 1.8% 334 Computer and Electronic Product Manufacturing 7,159 2.82 -29.1% 335 Electrical Equipment, Appliance and Component Manufactruing 3,208 1.86 -25.8% 3 326 Plastics and Rubber Products Manufacturing 9,529 1.81 -10.4% 311 Food Manufacturing 7,085 3.19 1.0% 111 Crop Production 1,104 2.59 -2.0% 4 336 Transportation Equipment Manufacturing 22,422 2.31 -11.8% 711 Performing Arts, Spectator Sports and Related Industries 6,285 2.66 1.8% 481 Air Transportation 5,013 2.59 -39.0% 5 492 Couriers and Messengers 8,955 2.07 -19.0% 322 Paper Manufacturing 1,178 2.22 -14.0% 327 Nonmetallic Mineral Product Manufacturing 1,441 2.03 -27.8% 6 333 Machinery Manufacturing 3,416 1.72 -12.0% 922 Justice, Public Order and Safety Activities 2,442 5.8 1.6% 326 Plastics and Rubber Products Manufacturing 3,003 2.27 2.1% 7 221 Utilities 832 1.91 -9.9% 928 National Security and International Affairs 2,953 9.58 -3.3% 212 Mining (Except Oil and Gas) 1,325 5.22 -0.4% 8 924 Administration of Environmental Quality Programs 612 3.38 1.7% 312 Beverage and Tobacco Product Manufacturing 730 4.25 -3.3% 333 Machinery Manufacturing 7,743 3.82 -12.7% 9 112 Animal Production 733 3.49 11.4% 323 Printing and Related Support Activities 1,482 2.14 -7.5% 311 Food Manufacturing 2,054 1.83 -7.2% 10 484 Truck Transportation 3,044 1.77 1.7% 337 Furniture and Related Product Manufacturing 8,187 4.12 -10.8% 212 Mining (Except Oil and Gas) 1,766 3.83 1.2% 11 335 Electrical Equipment, Appliance and Component Manufacturing 3,320 3.16 -4.3% *Employment of at least 500 Source: STATS Indiana and the Indiana Department of Workforce Development 2 incontext www.incontext.indiana.edu March 2006 St. Joseph Elkhart the three highest location quotients nor do they necessarily display net Marshall in 9 of the 11 regions (see Table 2). employment growth. Overall, most Kosciusko However, manufacturing industries do regions have not realized positive Fulton not appear among the top three LQs employment growth within their for the Indianapolis area (Region 5). top three LQ industries. The most Manufacturing jobs remain a core significant exception to this is the TABLE 3: EGR 2 TRANSPORTATION sector of the region’s total employment, transportation equipment manufacturing EQUIPMENT MANUFACTURING but the presence of other industries is industry in EGR 2 (see Table 3). Jobs LQ 38,573 significant and diverse when compared Region 2—comprised of Elkhart, Indiana Base 2.56 Midwest Base 4.08 to Indiana as a whole. Fulton, Kosciusko, Marshall and St. U.S. Base 9.07 Two of Region 5’s highest location Joseph counties—has an LQ of 2.56 in Source: STATS Indiana and the Indiana Department quotients fall into transportation and transportation equipment manufacturing of Workforce Development warehousing (NAICS industry sector (NAICS 336). This subsector has been 48-49). The region has a high LQ in driven mainly by the recreational air transportation (NAICS 481) and vehicle manufacturing boom in Elkhart couriers and messengers (NAICS 492); County. This concentration is even regions are in the southwestern part air transportation maintains a high LQ more pronounced when compared to the of Indiana with significant deposits of 2.59 despite major job losses in Midwest or United States. Region 2 has of coal. Coal mining is considered an this industry. Both of these industries a 4.08 LQ for this industry compared export industry, meeting the demands reflect the region’s emphasis on being to the Midwest and an astounding 9.07 of an area beyond the borders of these a distribution hub as the “Crossroads of when compared to the country as a regions. America.” whole. Other industries that have grown Location quotients are especially Another example of a distinguishing at relatively strong rates include animal useful identifying both the industry is arts, entertainment and production in EGR 9 (11.4 percent) and distinguishing industries and also recreation (NAICS sector 71) for plastics and rubber manufacturing in the commonalities between regional Region 1. The Region 5 economy EGR 7 (2.1 percent).