Friday, July 11, 2014

WFN Location Quotients

In the summer issue of Local Insights we discussed the value of economic diversity and the Hachman Index (a method used to measure industry diversification in the labor market)[1]. The article states that:

The Hachman Index is derived from the weighted average of the industry Location Quotients (LQ) in a region. A LQ measures the regional concentration of employment in a given industry relative to a larger geography. As a rule of thumb, an LQ of 1.2 or higher represents an industry with a relatively high concentration of regional employment, while a score of 0.8 or lower indicates sparse regional employment… Breaking the Hachman Index into individual components provides insight into the distribution of employment in a local economy.
Figure 2 in that article resembles the charts to the right, except that the data in the article was aggregated to the regional level. Combining the employment counts for all three Wasatch Front North counties obscures the concentration of employment in certain industries at the county level. This article sheds light on the relative density of employment in each county.

When examining the three charts, note the scale on the horizontal axis. In 2012, Davis and Weber counties had very few location quotient outliers. In Davis County, six industries were within the “normal” location quotient range; in Weber County there were 10 industries with “normal” location quotients. Furthermore, the industry with the highest concentration of employment compared to national averages was public administration for both counties, registering LQs of 2.4 (Davis) and 2.0 (Weber).

In contrast, Morgan County only has three industries with LQs in the “normal” range, and the industry with the highest concentration – covered agriculture, forestry, fishing & hunting – has a large LQ of 9.7.

In Utah, there is a correlation between the size of a county’s labor force and the degree of industrial diversity in the county; in general, this means the more workers in a county the more diverse the economy of that county.  So it is not surprising that Davis and Weber counties have less variance in their respective LQs compared to Morgan County.

Understanding the relative concentration of employment by industry lends some insight into the comparative advantages of a region. In terms of the Wasatch Front North, we see that the labor economy is relatively diverse.

[1] Article titled: Economic Diversity in Wasatch Front North