Tuesday, September 22, 2015

Measuring Utah’s Industrial Diversity

Cory Stahle, Economist

In the arena of financial investing, the advice to diversify one’s portfolio is strongly recommended. Mutual funds and investment groups attempt to lessen their risks by spreading out their investments. In the labor market, just like the stock market, industrial diversity is an important foundation for an economy to prosper and grow in the long term. A common tool used to measure labor market diversity is the Hachman Index.

The Hachman Index is calculated by taking the share of industry employment at a state level and comparing it against the same national profile. Industries are given proper weights to reflect their differing sizes, but a state profile that looks very much like the national profile would be classified as a diverse industrial distribution. The Hachman Index measures this diversity upon a scale between zero and one, with numbers nearer one being a more diverse economy.

In a previous blog, we looked at how Utah compared to other states in terms of industrial diversity (as measured by employment). Using 2012 annual data, Utah ranked fourth in industrial diversity. We have recalculated it with 2014 data, and Utah’s Hachman Index is now third in the nation, behind North Carolina and Missouri.

Having a diversified Utah economy helps lessen the impact of recessionary shocks by offsetting struggling industries with strong performers. In other words, diversification allows economies to reduce their exposure to the cyclical ups and downs inherent in a market-based economic system. If a particular industry or two falls upon hard times, the strength of the remaining industries helps to buoy the overall economic condition.


2 comments:

  1. We have examined both the Industry Income/Earnings and Employment/Wages over the last decade, and whilst Utah has steadily diversified its economic platform, we are slowing in our growth of Manufacturing-sensitive occupations and the succession plan to sustain the growth of the last business cycle. It appears our neighbors in Arizona and Colorado are now making up for lost time in this respect. Colorado continues to grow its Professional/Scientific/Technical Services sectors, even as its Manufacturing sector is rebounding faster than Utah's (we held the lead until recently).

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  2. Earlier today I entered a comment on the Diversity elements of the Hachman Index, noting some Utah creeping weaknesses vs. its neighboring States, and the looming succession plan exposures Utah has in key high WAGE industries like Manufacturing and Professional/Sci-Tech sectors. I would add that if the Tech sectors are occupation-loaded with Call Centers and Health Care, we are under the false assumption that this will continue sustaining adequate incomes to support our economic growth.

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