What is Economic Diversity?
We commonly hear of economic indicators such as Gross Domestic Product (GDP), unemployment rate, and personal income; but one we do not typically think of is economic diversity. Economic diversity measures the degree to which a region utilizes a broad mix of economic activities. For example, a region that relies predominantly on only oil production is not economically diverse, while another that sports a vibrant manufacturing and personal services sector in addition to oil is said to be more economically diverse.
This indicator is important to gauge how flexible and stable an economy will likely be during an unforeseen economic event. If oil prices plummet, the economy of a region tied only to oil production may suffer , while an economy that has additional strong business sectors will likely be more resilient. This is why (in part) many "company towns" that rose in the late 19th and early 20th centuries fell quickly.1 The adage "don't put all your eggs in one basket" rings true: the more economically diverse a region is, the better insulated it is against economic shocks.
Economic developers and site selectors should pay special attention to economic diversity since a non-diverse economic structure can hinder economic development planning efforts. Similarly, a new store in an economically diverse region is more likely to remain open during an economic downturn.
Methodology
There are many ways to measure economic diversity. One is the Herfindahl-Hirschman index (HHI),2 which measures the level of market concentration in an industry. Another is an entropy measure of diversity, such as the Shannon-Weaver index.3 These two indexes are based on the premise that the highest level of economic diversity is achieved when all industries are equally represented in a region. But in a modern economy, where consumer demand and technology evolve constantly, it is not realistic to expect as many people working in farming as in healthcare to achieve a more diverse economy. As a result, for the analysis shown here, Chmura uses a third statistic which compares the economic diversity of a region to the national level. Specifically, this index measures the industry employment mix of a region in comparison to that of the United States-the United States being the most economically diverse region with an index value of 0.00. For a comparison region, a relatively low index value implies that the region is fairly economically diverse, while a high value means the region is not very economically diverse.
Chmura's economic diversity analysis computes the Economic Diversity Index for every county and MSA at the 6-digit NAICS level-even when employment suppression issues make it difficult to find data for all industries. While the Bureau of Labor Statistic's county-level dataset is bound by non-disclosure rules, this analysis utilizes JobsEQ employment data which incorporates additional sources and methodologies to provide a complete employment dataset of all regions, making a thorough Economic Diversity Index calculation possible.
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Data Download
These data are available for download in Excel format: Economic Diversity by MSA , Economic Diversity by County
Data should be sourced to: Chmura Economics & Analytics, JobsEQ.