A Diversified Economy Keeps Jobs Stable

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A Diversified Economy Keeps Jobs Stable

Since my move to Cincinnati more than 30 years ago, I have heard people talk about Cincinnati’s diversified economy and how it has stabilized job growth. Yet, when a friend asked me recently how Cincinnati’s economic diversity was measured and the extent to which it affects job growth, I couldn’t easily answer; but the question piqued my curiosity. I enlisted some help from my colleagues at the Economics Center to construct a measure of economic diversity, which we then used to rank fourteen metropolitan areas within 400 miles of Cincinnati. For each of the fourteen regions, we measured the percentage of the workforce employed in 12 key sectors, such as manufacturing, business services, transportation and utilities, education and health services, financial activities, and government. We compared these distributions in the metro regions to the nation’s workforce. The greater the similarity of the region to the nation, the higher the diversification score. Of the fourteen metropolitan areas – from Pittsburgh to St. Louis and Milwaukee to Louisville – Cincinnati scored third. The two metros with the highest diversification score are St. Louis and Indianapolis; the least diversified are Grand Rapids, Milwaukee and Detroit.

Now that we had a way to describe economic diversity, the next piece of the puzzle was to connect it to job growth. It seems intuitive that job growth and diversification are related. Conventional wisdom predicts that diversified economies will experience fewer job losses during downturns, but also less job growth during expansions. Businesses cycles do not impact all industries equally, even when the cycles affect the entire economy. Some sectors may be hit harder than others during downturns, and some sectors may better able to ride the momentum of expansions. We looked at three periods: 2001-2003, a period of mild recession, 2004-2006, a period of job growth, and 2007-2008, a period of decline. As expected, overall the more diverse economies, including Cincinnati, fared better during bad economic times. Here are some results: for the top three diversified economies the rate of job loss was about one-tenth the rate of job loss in the lower ranking regions. Surprisingly, the more diversified economies also performed better in the good times, counter to what is typically expected. Economically diverse regions experienced about 60 percent more job growth than their less diverse counterparts. One explanation for this observation is the relatively high concentration of manufacturing in the regions we examined. This manufacturing sector suffered employment loss even during periods of expansion for the rest of the economy and hit the regions in our sample quite hard.

If we look at the top four regions on our diversification scale, Cincinnati has the greatest concentration of manufacturing. It is likely the greater presence of manufacturing in Cincinnati had the effect of mitigating job growth during 2004-2006. When almost all other metros lost jobs from 2001-2003, Cincinnati actually experienced positive employment growth. In times of national growth, Cincinnati region experienced muted growth, and more recently, we’ve seen fewer job losses than most of the metros we examined.

So, the answer to my friend is: yes, the Cincinnati region is diversified especially when compared with many of its neighbors. More importantly, diversification does seem to have a positive influence on job growth, at least in the Midwest. However, the precise effects of diversification on growth are complex and more analysis is required.

George Vredeveld, Director of the Economics Center for Education & Research and the Alpaugh Professor of Economics at the University of Cincinnati’s College of Business.