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Understanding Location Quotient

Overview

Location quotient (LQ) is a way of discovering the industries or occupations that are truly unique and specialized in your regional economy (compared to the national average).

For example, if the commercial bakeries industry in your city accounts for 2.5% of jobs but only 1% of jobs nationally, then the city’s commercial bakeries have an LQ of 2.5, which means that this industry is 2.5x more concentrated in the region than the typical region.

LQ for Industries and Occupations

The basic uses of location quotient include:

• Determining local or regional specialization. Here LQ is remarkably effective at quickly identifying those industries or occupations that stand out because of their higher than average per capita employment. This is what makes your economy unique.
• Identifying the region’s export industries. Industries with a high LQ are often those that are exporting a lot of goods and services out of the community and are therefore net-importers of valuable dollars.
• Identifying endangered export industries that could erode the region’s economic base.
• Identifying industries and occupations that are below equilibrium in the economy and that might be fighting to gain balance.

How LQ Is Calculated?

LQ is calculated by comparing an industry’s or an occupation’s share of regional employment with its share of national employment. Suppose breweries account for 8% of all regional jobs in Boise, ID, and 5% of all national jobs. Boise’s LQ for breweries would be (0.08 / 0.05) = 1.6, meaning brewery jobs are 1.6x more concentrated in the region than the rest of the nation on average.

Or say registered nurses in a region account for 10% of all jobs, while in the nation they account for 9% of all jobs. The LQ of nurses in the region is thus (.1 / .09) = 1.11. This means that the region’s concentration of nurses is just slightly higher than the national average.

What Does LQ Mean?

Industries with a high LQ are typically (but not always) export industries, which are important because they bring money into the region, rather than circulating local dollars around the economy (which is more typical for retail or restaurants).

Occupations with a high LQ are important because they are generally employed by high-LQ industries and thus provide a workforce-oriented perspective of the region’s economic base. Such occupations are vital for the continued prosperity of the region.

When considering an industry’s LQ, you need to also take into account the number of jobs and percent change. A high LQ signals high concentration, but the concentration’s impact on the regional economy depends on the number of jobs actually present in the economy. A positive or negative change in an industry’s LQ will be much more indicative of the economy’s health if the industry also employs a lot of people.

Examples:

1. For instance, in Butte, MT, mining has an LQ of 5.9 — which means that mining is nearly six times more concentrated there than the typical region — and employs over 400 workers. As a result, we know that mining is a vital component to the Butte economy. Other industries, such as newspaper publishers (LQ, 2.22) and tire dealers (LQ, 3.39) also have high LQs, but because they employ less than 70 people, a decline in employment in these two combined with the fact that mining is a far bigger export industry than newspaper publishing and tire dealing, would not shake Butte’s overall economy as much as employment loss in mining. Again, the point here is to have a tool to judge the importance, impact, and significance of industries so you can use data to drive focus (of limited time and resources) to what  matters most.
2. Seattle is a significant city for a variety of industries. For example, aircraft manufacturing (LQ, 21.32), software publishers (10.92), and electronic shopping (9.04) each have a notably high LQ in Seattle. Not surprising considering Seattle is home to global leaders within those industries (Boeing, Microsoft, and Amazon, respectively).

Because many of these industries also employ such a high number of workers, any drop in employment will negatively affect the entire Seattle area. For example, there are close to 70K aircraft manufacturing jobs in Seattle, the majority of which are employed by Boeing. Considering the recent malfunctions with Boeing 737s that have resulted in hundreds of grounded airplanes, Boeing’s LQ threatens to continue to drop in 2020 (in the last three years, aircraft manufacturing LQ dropped from 22.54 to 21.32). By using our Input-Output model, we were able to project the impact that this extended decline would have on the entire Seattle region:

Subtracting 500 jobs from the aircraft manufacturing industry means losing \$166M in earnings and an additional 1.7K jobs across the entire region.

3. This applies to specific occupations as well. For example, the Los Angeles metro area is known for its amusement parks (Six Flags, Disneyland) and the entertainment industry. Not surprisingly, there are close to 10K film and video editors in LA, which means that these jobs are nearly 9x more concentrated (LQ, 8.38) in LA than in the typical region. Because these jobs also earn an average of \$55/hour, a decline in employment would have a bigger ripple effect on the entire LA economy.

Applying LQ

In general, LQ is best used to find those economic gems that are super concentrated and specialized in your economy. Sometimes they’re obvious — like software publishing in Seattle or tourist attractions in Orlando. LQ helps establish the importance of these well-known industries so you can focus on nurturing their drive in your economy. In other cases, LQ helps reveal industries or occupations that you might not be as aware of, like greeting card publishers in Boulder, CO, or chocolate manufacturing in Topeka, KS.

Here are some additional applications for different sectors:

• Higher Education – Location quotient is useful for institutions looking to improve their curriculum. This is because an awareness of the region’s high-LQ industries and occupations can help colleges and universities focus on developing programs that align to high impact industries and the occupations that they need. Supporting higher impact industries and occupations is good for the region, good for the businesses, good for the students, and good for the overall economy. Programs that cater to the economy will help produce graduates who are more qualified for the workforce, which in turn creates more successful businesses and a healthier economy overall.
• Enterprise and Staffing – Location quotient can also be a valuable asset to business marketing efforts. A business seeking to expand can use LQ to find areas with the right talent pools and customize their job postings to attract talent from those areas. Regions with high LQ in a specific industry or occupation will more than likely have a good-sized talent pool to pull from, and directing job postings and marketing efforts to that area could be beneficial.
• Economic/Workforce Development – Additionally, LQ can be used to identify industry gaps. For example, the widely renowned healthcare industry in Spokane, WA, has an LQ of 1.33. But when the industry is broken down into smaller industries, several low-LQ areas come to the surface, such as outpatient care centers (LQ 0.37), nursing care facilities (LQ 0.91), and home healthcare (LQ 0.60). Focusing on building up these sectors could drive a higher LQ for the industry and bring more money into the Spokane economy.

The post Understanding Location Quotient appeared first on Emsi.

Source: https://www.economicmodeling.com/2020/02/03/understanding-location-quotient-2/

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