Economic base analysis
Encyclopedia
Economic base analysis was developed by Robert Murray Haig in his work on the Regional Plan of New York in 1928. Briefly, activities in an area divide into two categories – basic and non-basic. Basic industries are those exporting from the region and bringing wealth from outside; non-basic (or service) industries support basic industries. Because of data problems, it is not practical to study industry output and trade flows to and from a region. As an alternative, basic and non-basic concepts are operationalized using employment data.
The basic industries of the region are identified by comparing employment in the region to national norms. If the national norm for employment in, e.g. Egyptian woodwind manufacturing is five percent and the region’s employment is eight percent, then three percent of the region’s woodwind employment is basic. Once basic employment is identified, the outlook for basic employment is investigated sector by sector and projections made sector by sector. In turn, this permits the projection of total employment in the region. Typically the basic/non-basic employment ratio is about 1:1. Extending by manipulation of data and comparisons, conjectures may be made about population and income. This is a rough, serviceable procedure and it continues in use today. It has the advantage of being readily operationalized, fiddled with, and understandable.
The formula for computing location quotients can be written as:
Where:
Local employment in industry i
Total local employment
Reference area employment in industry i
Total reference area employment
It is assumed that the base year is identical in all of the above variables.
The figure showing location quotients uses data from Compare Minnesota: Profiles of Minnesota’s Economy and Population, 2002-2003. It uses the term location quotient, a number derived by comparing percent employment in a place (Minnesota) with percent employment nationwide. Minnesota
has about the same percentage of high technology employment as does the nation. It has more medical devices employment than the national average (due to companies such as Medtronic
).
Economic base ideas are easy to understand as are measures made of employment. For instance, it's common knowledge that the economy of Seattle, Washington
is tied to aircraft manufacturing, Detroit, Michigan
to automobiles, and Silicon Valley
to high tech manufacturing. When the newspapers discuss the closing of military bases, they will say some thing like: "5,000 jobs at the base will be lost. That’s going to hit the economy hard because it means a loss of 10,000 jobs in the community."
To forecast, what’s mainly done is to compare the region with the nation and national trends. If the economic base of a region is in industries that are declining nationwide, then we have a problem. If our economic base is concentrated in sectors that are growing, then we are in good shape.
Methodologically, economic base analysis views the region as if it were a small nation and uses notions of relative and comparative advantage from international trade theory (Charles Tiebout
1963). In a sense the activity is macroeconomics “written small” (and it has not been of much interest to urban economists in recent years because it does not get at within-city relationships.) The analysis usually takes US growth patterns as a given. The fates of regions are determined by trends in the national economy.
Today, export activities purchase many services, and the comparative advantage of an area may well lie in the services it produces. Peter Drucker
(1986) imagines a world dominated by trade in ideas and designs. There is little merchandise trade because technology permits small-scale manufacturing. Such a world would change our ideas of what’s basic.
The concept is that of a trading region. But in practice economic base concepts are often applied to areas that fit the concept. The Minnesota study, cited before, compared the Minnesota to the US. One can speak of the economic base of Saint Paul
, Minneapolis
, or Duluth
, but to go on and compare such areas using economic base techniques isn’t very meaningful.
Forecasting is a precursor to actions, and there is no explicit way to get from the economic base to the kinds of actions most communities are interested in. That is, the economic base study doesn’t say what to do. Leaders say they want desirable economic activities, such as high tech ones. Indeed, we have seen studies of the transport needs of high tech industries, studies done prior to investments to attract such industries (for example in Pennsylvania). Again, the economic base study doesn’t say what to do.
Even if we could make what-to-do linkages, the calculus of “desirable” is not simple. We suppose that high pay, little environmental insult, upward mobility for workers, and stability or growth are among the attributes desired of new activities. The table below gives information on the pay attribute. Clearly, that attribute has to be traded off against other attributes.
The basic industries of the region are identified by comparing employment in the region to national norms. If the national norm for employment in, e.g. Egyptian woodwind manufacturing is five percent and the region’s employment is eight percent, then three percent of the region’s woodwind employment is basic. Once basic employment is identified, the outlook for basic employment is investigated sector by sector and projections made sector by sector. In turn, this permits the projection of total employment in the region. Typically the basic/non-basic employment ratio is about 1:1. Extending by manipulation of data and comparisons, conjectures may be made about population and income. This is a rough, serviceable procedure and it continues in use today. It has the advantage of being readily operationalized, fiddled with, and understandable.
The formula for computing location quotients can be written as:
Where:
Local employment in industry iTotal local employmentReference area employment in industry iTotal reference area employmentIt is assumed that the base year is identical in all of the above variables.
The figure showing location quotients uses data from Compare Minnesota: Profiles of Minnesota’s Economy and Population, 2002-2003. It uses the term location quotient, a number derived by comparing percent employment in a place (Minnesota) with percent employment nationwide. Minnesota
Minnesota
Minnesota is a U.S. state located in the Midwestern United States. The twelfth largest state of the U.S., it is the twenty-first most populous, with 5.3 million residents. Minnesota was carved out of the eastern half of the Minnesota Territory and admitted to the Union as the thirty-second state...
has about the same percentage of high technology employment as does the nation. It has more medical devices employment than the national average (due to companies such as Medtronic
Medtronic
Medtronic, Inc. , based in suburban Minneapolis, Minnesota, is the world's largest medical technology company and is a Fortune 500 company.- History :...
).
Economic base ideas are easy to understand as are measures made of employment. For instance, it's common knowledge that the economy of Seattle, Washington
Seattle, Washington
Seattle is the county seat of King County, Washington. With 608,660 residents as of the 2010 Census, Seattle is the largest city in the Northwestern United States. The Seattle metropolitan area of about 3.4 million inhabitants is the 15th largest metropolitan area in the country...
is tied to aircraft manufacturing, Detroit, Michigan
Detroit, Michigan
Detroit is the major city among the primary cultural, financial, and transportation centers in the Metro Detroit area, a region of 5.2 million people. As the seat of Wayne County, the city of Detroit is the largest city in the U.S. state of Michigan and serves as a major port on the Detroit River...
to automobiles, and Silicon Valley
Silicon Valley
Silicon Valley is a term which refers to the southern part of the San Francisco Bay Area in Northern California in the United States. The region is home to many of the world's largest technology corporations...
to high tech manufacturing. When the newspapers discuss the closing of military bases, they will say some thing like: "5,000 jobs at the base will be lost. That’s going to hit the economy hard because it means a loss of 10,000 jobs in the community."
To forecast, what’s mainly done is to compare the region with the nation and national trends. If the economic base of a region is in industries that are declining nationwide, then we have a problem. If our economic base is concentrated in sectors that are growing, then we are in good shape.
Methodologically, economic base analysis views the region as if it were a small nation and uses notions of relative and comparative advantage from international trade theory (Charles Tiebout
Charles Tiebout
Charles Mills Tiebout was an economist and geographer most known for his development of the Tiebout model, which suggested that there were actually non-political solutions to the free rider problem in local governance. Graduated Wesleyan University in 1950, received PhD in economics in University...
1963). In a sense the activity is macroeconomics “written small” (and it has not been of much interest to urban economists in recent years because it does not get at within-city relationships.) The analysis usually takes US growth patterns as a given. The fates of regions are determined by trends in the national economy.
Critique of the economic base concept
The economic base concept emerged in the 1920s, when economics focused on different industrial strengths and economic techniques were not as nuanced. The exporting (basic) activities were manufacturing and trade activities and they could be readily identified in the data series. One could think of changes in those activities as causing growth or decline.Today, export activities purchase many services, and the comparative advantage of an area may well lie in the services it produces. Peter Drucker
Peter Drucker
Peter Ferdinand Drucker was an influential writer, management consultant, and self-described “social ecologist.”-Introduction:...
(1986) imagines a world dominated by trade in ideas and designs. There is little merchandise trade because technology permits small-scale manufacturing. Such a world would change our ideas of what’s basic.
The concept is that of a trading region. But in practice economic base concepts are often applied to areas that fit the concept. The Minnesota study, cited before, compared the Minnesota to the US. One can speak of the economic base of Saint Paul
Saint Paul, Minnesota
Saint Paul is the capital and second-most populous city of the U.S. state of Minnesota. The city lies mostly on the east bank of the Mississippi River in the area surrounding its point of confluence with the Minnesota River, and adjoins Minneapolis, the state's largest city...
, Minneapolis
Minneapolis, Minnesota
Minneapolis , nicknamed "City of Lakes" and the "Mill City," is the county seat of Hennepin County, the largest city in the U.S. state of Minnesota, and the 48th largest in the United States...
, or Duluth
Duluth, Minnesota
Duluth is a port city in the U.S. state of Minnesota and is the county seat of Saint Louis County. The fourth largest city in Minnesota, Duluth had a total population of 86,265 in the 2010 census. Duluth is also the second largest city that is located on Lake Superior after Thunder Bay, Ontario,...
, but to go on and compare such areas using economic base techniques isn’t very meaningful.
Forecasting is a precursor to actions, and there is no explicit way to get from the economic base to the kinds of actions most communities are interested in. That is, the economic base study doesn’t say what to do. Leaders say they want desirable economic activities, such as high tech ones. Indeed, we have seen studies of the transport needs of high tech industries, studies done prior to investments to attract such industries (for example in Pennsylvania). Again, the economic base study doesn’t say what to do.
Even if we could make what-to-do linkages, the calculus of “desirable” is not simple. We suppose that high pay, little environmental insult, upward mobility for workers, and stability or growth are among the attributes desired of new activities. The table below gives information on the pay attribute. Clearly, that attribute has to be traded off against other attributes.
| Industry | Average weekly earnings (April 2003) |
|---|---|
| Mining: | 774.58 |
| Construction: | 721.58 |
| Manufacturing: | 629.43 |
| Transportation and public utilities: | 670.32 |
| Wholesale trade: | 627.13 |
| Retail trade: | 296.80 |
| Finance, insurance, and real estate: | 611.90 |
| Services: | 507.43 |
| Total private: | 511.39 |