Economic Base Analysis

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 something 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.