Among Top Metros, Chicago’s Industry Mix Most Resembles Nation

June 15, 2011

Chicago has been called the most American of American cities, often in reference to its central location, entrepreneurial history, and pioneering cultural contributions. However, if Chicago is in fact a mirror to the nation, the similarities may be most evident in the makeup of the regional economy. According to 2010 employment data, the Chicago region’s industry mix – or distribution of employment across sectors – most closely matches the U.S. among major metros. From a risk perspective, this is important because it implies that, when faced with broad market fluctuations, the Chicago economy would react most like the greater national economy.

Economic diversity in U.S. metros can be measured many ways, but the location quotient (LQ) is among the simplest and most common. Less a measure of diversity within regions, and more a method of benchmarking industry mix across regions, LQs compare the share of local employment by industry to its corresponding national share – an LQ of 1 means the shares are equal; above/below 1 means the local employment concentration is higher/lower than the national. For example, if 20 percent of all regional jobs are in transportation, but transportation comprises only 17 percent of all jobs nationally, the region’s transportation LQ would be 1.18 (20/17 = 1.18).

Intuitively, higher LQs are better; these indicate the economic specializations that define regions. However, outsized local industries are more sensitive to market swings – and, as with any investment portfolio, diversification is the best hedge against widespread loss. Following this logic, metros with LQs that collectively deviate least from 1 (i.e. that most align with the national employment distribution) are least likely to suffer disproportionately during a national downturn.

Using 2010 annual employment numbers from Moody’s Analytics, I calculated LQs for 80 major sectors across all 366 U.S. metropolitan statistical areas (MSA). I then calculated the absolute deviation from 1 for each of these 29,280 LQs, averaging them by MSA. Ranking each MSA by its average absolute deviation (“score”), I compiled the list below. Of the 10 largest regional economies, Chicago’s industry mix is decisively most similar to the national benchmark; it trails only St. Louis (.255) and Kansas City (.281) when this analysis is applied to all 366 U.S. MSAs.

Rank

Metropolitan Statistical Area

Score

1

Chicago-Joliet-Naperville, IL-IN-WI 

0.288

2

Philadelphia-Camden-Wilmington, PA-NJ-DE-MD 

0.323

3

Dallas-Fort Worth-Arlington, TX 

0.332

4

Atlanta-Sandy Springs-Marietta, GA 

0.351

5

Boston-Cambridge-Quincy, MA-NH

0.422

6

Washington-Arlington-Alexandria, DC-VA-MD-WV

0.445

7

New York-Northern New Jersey-Long Island, NY-NJ-PA

0.450

8

Los Angeles-Long Beach-Santa Ana, CA 

0.464

9

Miami-Fort Lauderdale-Pompano Beach, FL

0.479

10

Houston-Sugar Land-Baytown, TX

0.660

Click on the map below to view specific LQs for the 10 largest MSAs by employment; industries are listed by 3-digit NAICS code.

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2 Comments

Economic Strength and Resilience

How is this statistic related to an area's economic strength and resilience?  Is Chicago's low score a positive indicator?  It seems not.  The recession-proof Washington DC area and two Texas metropolitan areas outrank Chicago —and if the St. Louis area has the lowest score, how is a low score a good thing?

You raise some good points.

You raise some good points. This statistic does not directly indicate economic “strength and resilience,” and it is somewhat unconventional to tout collectively moderate LQs instead of specific, larger ones. Instead, this analysis was meant to illustrate how closely Chicago's economy, represented by employment across industries, mirrors that of the U.S. as a whole. Since Chicago's economy is composed more like the broader economy, it is more likely to react like the broader economy; this could be viewed as a measure of economic stability and diversity, if not outright strength and resilience.

Washington D.C. and Houston fared well in the recent recession because their most concentrated industries – professional services/government and petroleum products, respectively – were not as adversely affected as others. However, specializations can also work against regional economies, as the historic shift in manufacturing has shown. The point here is not to diminish the importance of regional specializations; Chicago has plenty – more than many other cities, in fact, which is why one does not so strongly dominate the others. But supporting a region on a few outsized industries brings long-term risks that a more balanced economy, like Chicago, would better avoid.

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