May 12, 2016: Specialization and Growth of New Jersey's Economic Sectors

Last week, we looked at New Jersey industry sectors as they changed size with time.  This week, we add a second calculation: the Location Quotient (LQ).  Location quotients[i] are ratios that allow an area’s specialization in particular industries to be measured. This measurement is enabled by comparing employment concentration in specific industry sectors to the same concentration in a reference area. In our analysis, we are comparing the concentration of New Jersey’s total employment in each two-digit NAICS industry sector to that of the United States. Observing the LQ of industry sectors will tell us whether or not New Jersey specializes in a particular sector, compared to the nation.

In our analysis, the LQ of each industry sector is calculated as the percentage of New Jersey’s total employment employed in that particular sector divided by the percentage of the nation’s total employment employed in the same sector. If an LQ of a sector is equal to one, the sector comprises the same share of total employment in New Jersey, as it does for the U.S. as a whole. An LQ greater than one indicates an industry sector that comprises a greater share of total employment in New Jersey than is the case for the nation, thus indicating an industry sector in which New Jersey specializes. The time period for this analysis is 2009-2014.  Due to a lack of available data, government jobs are not represented in this analysis.

It is important to understand in which industry sectors our economy specializes, as well as lags. According to the Economic Base Theory[ii], sectors or industries of specialization, or those with high LQs, constitute a competitive advantage for the local economy by drawing employees into the local economy to work in these sectors. In Economic Base Theory terms, this is known as “exporting” production to areas or workers outside the local economy. These specialized sectors, in turn, drive employment in other supporting industry sectors. Drastic changes to any industry in a sector of specialization will produce widespread changes felt throughout the entire local economy. Economies that are dominated by, or specialize in high-skill and high-wage industry sectors are likely stronger and more stable than economies that specialize in low-skill and low-wage sectors.

 

   

The bubble chart below plots industry sector growth from 2009 to 2014 on the horizontal axis and the location quotient on the vertical axis, while the size of the bubble represents the employment in each particular sector.  In order to interpret the key observations of the chart, we have chosen to highlight results of industry sectors in each of the chart’s four quadrants. Beginning with the upper left-hand quadrant, we find the industry sectors of “Finance and Insurance”, Transportation and Warehousing”, and “Wholesale Trade”. These sectors can be viewed as “Legacy Industry Sectors”, ones in which our state’s economy has historically specialized, but may be in danger of losing specialized status due to stagnant or negative employment growth. The case of the “Wholesale Trade” sector, the sector in which we most specialize, is particularly interesting; as a small loss in employment over the past six years could spell a reduction in our competitive advantage in this sector.  

Moving clockwise to the upper right-hand quadrant, we find such sectors such as “Management of Companies and Enterprises”, “Professional, Scientific, and Technical Services”, “Retail Trade”, and “Health Care and Social Assistance”. These sectors can be viewed as “Star Sectors”, or ones in which we currently specialize, and in which employment growth is positive. Extreme employment growth in the leaders of this group, such as “Administrative and Support and Waste Management and Remediation Services”, could catapult certain sectors into even higher specialization and competitive advantage in the future.

Next, we move to the lower right-hand quadrant and find such sectors as “Accommodation and Food Services” and “Construction”. These sectors can be viewed as “Emerging Sectors”, ones in which we don’t currently specialize, but in which employment growth is positive.  Sectors in this quadrant are catching-up to the national average. Extreme employment growth in the leaders of this group, such as “Educational Services”, could signify specialization and competitive advantages in new sectors in the future.

Finally, we come to the lower left-hand quadrant and find sectors such as “Manufacturing”, “Information”, and “Real Estate and Rental Leasing”. These sectors can be viewed as “Declining Sectors”, ones in which we do not specialize, and which are losing employment. If past employment growth trends continue, these sectors are at even further risk of declining in importance in New Jersey’s economy.

These sectors demonstrate a very coarse level of analysis.  It is hard to tease apart, say, doctors from nurses, or college professors from elementary school teachers when looking at two-digit NAICS industry sectors.  Next week we will zoom in from the sector level to the industry level to reveal finer grain details of the economy.  We will also reveal the average earnings for these industries.

Source: US Census Bureau Center for Economic Studies

 

[i] Bureau of Labor Statistics. http://www.bls.gov/help/def/lq.htm

 

[ii] M. Dinc, "Regional and Local Economic Analysis Tools," ed. Washington DC: World Bank, 2002. http://info.worldbank.org/etools/docs/library/128789/Dinc%202001.pdf.