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Economic Analysis Methods for Planners

Economic Analysis Methods for Planners Standard Industrial Code Classifies all U.S. industries by 4-digit code Industries can also be aggregated to 3-digit SICs or 2-digit SICs

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Economic Analysis Methods for Planners

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  1. Economic Analysis Methodsfor Planners

  2. Standard Industrial Code • Classifies all U.S. industries by 4-digit code • Industries can also be aggregated to 3-digit SICs or 2-digit SICs • Summing all 4-digit industries should produce the same total as summing all the 3-digit industries or 2-digit industries • For a full SIC listing see http://www.smartbiz.com/sbs/arts/sbs80.htm

  3. Sample SICs • 25 Furniture And Fixtures • 251 Household Furniture • 2511 Wood household furniture • 2512 Upholstered household furniture • 2514 Metal household furniture • 2515 Mattresses and bedsprings • 2517 Wood TV and radio cabinets • 2519 Household furniture • 252 Office Furniture • 2521 Wood office furniture • 2522 Office furniture, except wood

  4. SIC Major Industry Divisions • Division A. - Agriculture, forestry, & fishing (01-09) • Division B. - Mining (10-14) • Division C. - Construction (15-17) • Division D. - Manufacturing (20-39) • Division E. - Transportation & pub. utilities (40-49) • Division F. - Wholesale trade (50-51) • Division G. - Retail trade (52-59) • Division H. - Finance, insurance, & real estate (60-67) • Division I. - Services (70-89) • Division J. - Public administration (91-97) • Division K. - Nonclassifiable establishments (99)

  5. NAICS, the SIC Replacement • New North American Industry Classification System is replacing the SIC • See this Web site for details http://www.census.gov/epcd/www/naics.html • 1997 Economic Census is in NAICS • Problems of time-series, conversion • See the URL above for NAICS-SIC conversion information

  6. Economic Base Theory • Economy is made up of two components: • Basic (or export): sells outside of region • Service (or non-basic): sells inside region • Basic sector is key to region’s economic health • Expansion or decline in basic sector leads to overall expansion or decline • Economic base multiplier is ratio of total employment to basic employment. It tells how many total jobs are created from the addition of one basic job.

  7. Illustrative Base Multipliers ---------- SIC Digits --------- Place/Year 1&2 2-dig 3-dig 4-dig ---------------------------------------------------------------- Philadelphia 77 --- 9.11 6.04 5.15 Washington DC 77 --- 2.97 2.81 2.80 Monmouth Co NJ 77 --- 5.16 3.88 3.50 Wilmington NC 87 6.85 Charlotte NC 5.76

  8. Methods for Calculating Base Employment • Direct method: survey of local firms • Sector assignment: agricultural, mining, manufacturing, and federal government are usually assigned to basic sector • Location quotients: all LQs above 1 are export • Minimum requirements: LQ comparison to minimum sector employment in similar areas • Regression approach: prediction model for each sector

  9. Location Quotient Calculation • For any one year, in each industry calculate • (a) Local industry emp. / total local emp. • (b) National industry emp. / total national emp. • Divide (a) by (b) • Meaning of LQs • Equals 1.0: local importance = national importance • Under 1.0: local importance < national importance • Over 1.0: local importance > national importance • Often LQs over 1.0 are taken to mean basic (export) industries

  10. Economic Base Multipliersfrom Location Quotients • To estimate basic employment in each industry: • Calculate what local employment would be if LQ = 1.0 • LQ1Emp = (NatIndEmp / NatTotEmp) * LocTotEmp • Calculate “excess” employment from LQ > 1.0 • ExcessEmp = LocIndEmp - LQ1Emp • For all industries, add “excess” employment to calculate total basic employment (TotExcessEmp) • Calculate economic multiplier • LocTotEmp / TotExcessEmp

  11. Employment Projection with Multipliers • Calculate base multiplier • Calculate future basic employment through trend extrapolation or other method • Multiply future basic employment times multiplier to calculate total future employment

  12. Shift Share Analysis Theory • Divides employment change in each industry into three components • Total local industry growth is “explained” by analysis of the different components • Sum of three components must equal actual growth • National growth: how much would employment have grown if it equaled total national employment growth? • Industrial mix: individual national industries grow faster (sunrise industries) or slower (sunset industries) than total national growth. If the

  13. Shift Share Analysis Data • Need employment by industry for two comparable time periods • Use REIS or County Business Patterns or Economic Census data • See course home page for links to Oregon State and Univ. of Virginia Web data sites • Gwinnett County example will use 1987 and 1997 REIS data

  14. Three Shift Share Components • (1) National growth component: • how much would employment have grown if it equaled total national employment growth? (NatRate * LocIndEmp at period start) • (2) Industrial mix component: • Individual national industries grow faster (sunrise industries) or slower (sunset industries) than total national growth. • Calculate the difference between the national industry growth rate and national total growth rate (NatRateDif) • Multiply NatRateDif * LocIndEmp at period start

  15. Three Shift Share Components • (3) Local share component • Calculate actual local industry employment change over the period (change = [LocIndEmp at end] - [LocIndEmp at start] • Subtract components (1) and (2) from the change • Result is local share component • Local share component is interpreted to reflect local competitive advantage • Add three components to ensure they sum to actual change

  16. Forecasting Employment with Shift Share • Secure future projections of national total employment and national industry employment, or use existing trends • For each industry • Calculate LocSharePct as (local share / LocIndEmp at start of period)

  17. Forecasting Employment with Shift Share • Using local industry employment at the end of the period calculate three components • (1) National growth: LocIndEmp * Projected national growth percent • (2) Industrial mix: LocIndEmp * (ProjNatIndEmp growth percent- ProjNatTotEmp growth percent) • (3) Local share: LocIndEmp * LocSharePct • Sum three components for total projected industry change

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