Hachman index of economic diversity, 2021

The Hachman Index measures economic diversity. Using indicators such as gross domestic product (GDP) or employment, the index measures the mix of industries present in a particular region relative to a (well-diversified) reference region. The Hachman Index normalizes scores from 0 to 100. A higher score indicates more similarity with the reference region, while a lower score indicates less similarity.

Research Brief March 2023 Hachman Index of Economic Diversity, 2021 Nate Lloyd, Director of Economic Research OVERVIEW The Hachman Index measures economic diversity. Using indicators such as gross domestic product (GDP) or employment, the index measures the mix of industries present in a particular region relative to a (well-diversified) reference region. The Hachman Index normalizes scores from 0 to 100. A higher score indicates more similarity with the reference region, while a lower score indicates less similarity. The Hachman Index is often applied at the national level using GDP, allowing for comparison between individual states. Since the well-diversified U.S. economy serves as the reference region, states with higher scores not only have economies similar to the national economy but are also economically diverse states. With reliable data, the index may be applied to measure industrial distribution across counties as well. This chapter examines the results of a Hachman Index analysis at the state and county levels using 2021 data. Utah in Top 5 for Economic Diversity Utah increased from the sixth to the fifth most economically diverse state in the U.S. between 2020 and 2021. Missouri (97.0) and Georgia (96.6) remain the most economically diverse states in the nation. Arizona (96.4) and Illinois (95.9) swapped places in the rankings while Utah (95.6) rounds out the top 5, edging out North Carolina (95.5) and Pennsylvania (95.4), which ranked 7th and 5th last year, respectively (see Figure 3.1). All seven of these states have index scores above 95 (see Table 3.1). As the Hachman Index is a relative measure, it is not definitive that any one of these states is significantly more diverse than another.1 Utah ranks second in the West for economic diversity. California, Washington, Colorado, Arizona, and Oregon all have larger economies than Utah, but only Arizona has a higher Hachman Index score.2 States with similar-sized economies include Alabama, Kentucky, Oklahoma, and Iowa.3 Of these, only Alabama has an index score above 90, indicating a very diverse economy. Alabama scores 91.1, Kentucky 88.6, Iowa 70.7, and Oklahoma 58.4. Despite Utah’s midsized economy (29th largest), its industrial composition is more diverse than that of the largest state economies. Kem C. Gardner Policy Institute I Urban Counties More Diverse, Rural Counties More Specialized Salt Lake, Weber, Davis, Utah, and Washington counties remain the most economically diverse counties within Utah as of 2021. Because adequate GDP data are not available at the county level, we analyze employment data. A Hachman Index analysis of Utah Department of Workforce Services and Bureau of Labor Statistics data using two-digit NAICS codes shows the economic disparity of Utah’s counties. As with the state-level analysis, the index uses the entire U.S. economy as the (well-diversified) reference region to analyze economic diversity among counties in Utah. Urban counties tend to have more diverse economies with a larger variety of employment opportunities and a wider range of industry sectors available to the population (see Figure 3.2). Washington County is the largest county outside of the Wasatch Front and the fifth most diverse county in Utah. By absolute change, the top 5 counties for population growth are also the most economically diverse. Other fast-growing counties (by rate of population growth) include Wasatch County, Morgan County, and Tooele County.4 As more people move to these counties and the employment opportunities increase in them, the industrial composition will continue to diversify. Most of the counties bordering Salt Lake County have relatively diverse economies. Davis, Utah, and Tooele all have index scores above 75, ranking in the top 10 for most diverse Utah counties (see Table 3.2). A notable exception is Summit County, which has high employment in arts, entertainment and recreation and accommodations and food services, the result of a tourism-based economy centered on Park City.5 Another exception is Morgan County, which has the state’s highest concentration of construction employment. In counties with small populations, just a few large employers can have an outsized effect on the counties’ overall employment mix. Duchesne, Emery, and Beaver remain the least economically diverse counties. In Emery and Duchesne, the low index scores are a result of a heavy concentration in mining (and utilities, in the case of Emery).6 These counties have a competitive advantage in the extractive industries due to their natural 411 East South Temple Street, Salt Lake City, Utah 84111 I 801-585-5618 I gardner.utah.edu resources, which are geographically dependent and not found everywhere in Utah. Beaver’s highest industrial concentration in 2021 is in agriculture. Like Morgan and Summit counties, all three have relatively small populations, so just a few large employers can have a significant effect on their industrial composition. With a few exceptions, Utah’s metropolitan counties have the most diverse economies in the state, followed by the adjacent ring counties. The rural counties with smaller populations and fewer industries have the least diverse economies. This highlights a clear urban-rural divide in the economic opportunities available to Utahns. Urban counties offer a more diverse array of economic opportunities across a larger set of industries, while rural counties have fewer industries and economic opportunities to choose from. While economic diversification is not a measure of economic prosperity, it is an indicator of greater economic choice and opportunity. than the reference area and more concentrated in fewer industries. Diversity in economic opportunities, as represented by a diverse set of industries, is generally considered a positive contributor to a region’s economic stability. The Hachman Index is not without its shortcomings. For one, the subject area is contained within the reference region, i.e. Utah is included in the U.S., and so, to some degree, the subject area is being compared to itself. Another limitation of the Hachman Index is that it does not account for the competitive advantages of a region. A region may have an advantage specializing in a specific industry, making a concentration in that industry economically justifiable over a more diversified economy. Although diversification is usually considered a positive attribute for an economy, an increase in diversity may not be good for the labor market. As discussed in the 1995 Economic Report to the Governor, Utah had specialized in metal mining industries. In the mid-1980s Kennecott experienced major layoffs, which decreased its share of the overall Utah economy and therefore raised the measure of diversity in Utah. However, the effect on the labor market was negative, with lower employment levels. The transition to increased industrial diversity may not immediately result in improvements for residents of a region or imply economic growth.9 The Hachman Index is also affected by the measures used. The value of the Hachman Index will be affected if broader measures are used. For example, an index calculated from employment by industry will behave differently over time from one calculated from GDP, due to changes in labor productivity that lead to increased production using fewer employees. Calculating the Hachman index The Hachman Index is the reciprocal sum, or mean location quotient, of the study area across all industries where the mean is generated by weighting the respective sectors’ location quotients7 by the sector shares in the region.8 The Hachman Index for a given time period is calculated as follows: 1 ( HI = ∑i ( ) ESi ERi x ( ESi ) ) ESi is the share of the subject area's economic indicator in industry i. ERi is the share of the reference region's economic indicator in industry i. Here, the state-level analysis utilizes GDP while the countylevel analysis uses employment as the economic indicator. A Hachman Index score ranges from 0 to 100. A higher score indicates that the subject area’s industrial distribution more closely resembles that of the reference geography and is therefore diverse. A lower score indicates a region is less diverse 1 2 3 4 5 6 7 8 9 The variation among the top five state scores is 1.4 points. The Hachman Index is not an exact measure and small differences are not definitive. When comparing state scores, the exact score is less important than the rank and size of the variation in scores relative to other states. When ranking state economies by size using total nominal GDP, California is the largest in the nation, Washington ranks 11th, Colorado ranks 15th, Arizona ranks 18th, and Oregon ranks 24th. Utah ranks as the 29th largest state economy. See the BEA’s seasonally adjusted annual rates ending 2022 Q3, found at: https://www.bea.gov/data/gdp/gdp-state. When ranking state economies by size using total nominal GDP, Alabama (27th) and Kentucky (28th) rank just larger than Utah, and Oklahoma (30th) and Iowa (31st) rank just smaller. See the BEA’s seasonally adjusted annual rates ending 2022 Q3, found at: https://www.bea.gov/data/gdp/gdp-state. Kem C. Gardner Policy Institute, 2021, “First Insights – 2020 Census Utah Counties and Communities,” Fact Sheet, August 2021, available from https://gardner.utah.edu/wp-content/ uploads/C2020-Counties-FS-Aug2021.pdf. This concentration is measured by the comparison of the location quotients of each employment sector in Summit County. Arts, entertainment, and recreation ranks first, with a location quotient of 9.8, followed by real estate and rental and leasing (3.2), and accommodation and food services (2.4). Duchesne has the highest mining location quotient of all counties in the state at 43.8, followed by Uintah at 28.3. The next highest are Emery at 25.4, Carbon at 24.6, and Sevier at 18.2. all well above other counties in the state. A location quotient measures the relative concentration of an industry in one area compared with another. The Bureau of Labor Statistics defines it as a “ratio that compares the concentration of a resource or activity, such as employment, in a defined area to that of a larger area or base. For example, location quotients can be used to compare state employment by industry to that of the nation.” It is calculated by dividing an industry’s share of the total (employment, GDP, etc.) in the study region by its share in the reference region. Frank Hachman, 2002, “The Degree of Similarity Index: A Measure of Diversification Superior to the Hachman Index,” unpublished manuscript. 1995 Economic Report to the Governor, pages 207–214. March 2023 I gardner.utah.edu 2 I N F O R M E D D E C I S I O N S TM 1 St. George Figure 1: Hachman Index Scores for the States, 2021 WA 76.5 MT 85.0 OR 92.9 ID 86.7 NV 74.5 CA 93.0 UT 95.6 AZ 96.4 ND 35.1 WY 36.9 CO 93.8 KS 90.4 MO 97.0 OK 58.4 AR 85.8 TX 74.7 AK 36.3 WI 91.2 IA 70.7 NE 67.7 NM 63.5 ME 91.1 MN 93.2 SD 54.5 Figure 2: Hachman Index Scores for Counties in Utah, 2021 LA 86.5 Box Elder 55.4 NY 75.5 MI 91.5 PA 95.4 OH IL IN 92.3 95.9 77.8 WV VA 51.2 90.6 KY 88.6 NC TN 95.5 91.3 SC 91.9 AL GA MS 91.1 96.6 85.4 Cache 73.3 Rich 49.7 Weber 87.1 Davis 85.2 Morgan 52.3 Daggett 36.8 VT 90.2 NH 92.2 MA 88.4 RI 89.2 CT 90.8 NJ 93.9 MD 87.3 DE 67.9 DC 49.3 Tooele 77.3 FL 90.5 Summit 37.5 Salt Lake 94.1 Wasatch Duchesne 68.3 12.9 Utah 83.4 Juab 66.3 Carbon 31.4 HI 72.4 95.0+ (Most Diverse) 90.0–94.9 <75.0 (Least Diverse) 85.0–89.9 75.0–84.9 Sanpete 63.1 Millard 33.7 Beaver 22.2 Wayne 50.2 Piute 25.3 Table 1: Hachman Index Scores for the States, 2021 Hachman Index Missouri Georgia Arizona #1 6.9% Illinois State 97.0 Kentucky 88.6 96.6 Massachusetts 88.4 96.4 Maryland 87.3 95.9 Idaho 86.7 95.6 Louisiana 86.5 North Carolina 95.5 Arkansas 85.8 Pennsylvania 95.4 Mississippi 85.4 New Jersey 93.9 Montana 85.0 Colorado 93.8 Indiana 77.8 Minnesota 93.2 Washington 76.5 California 93.0 New York 75.5 #2 6.6% Utah Oregon Ohio 3.1% to 6.9% 92.9 92.3 Texas 0.1% to 3.0% Nevada Iron 79.9 Hachman Index Grand 44.6 Emery 18.8 Sevier 43.0 Source: Kem C. Gardner Policy Institute analysis of U.S. Bureau of Economic Analysis GDP data State Uintah 25.1 Garfield 39.4 Washington 82.3 San Juan 41.4 Kane 44.8 80+ (Most Diverse) 60.0–79.9 40.0 - 59.9 20.0 - 39.9 <20.0 (Least Diverse) Source: Kem C. Gardner Policy Institute analysis of Bureau of Labor Statistics (United States) and Utah Department of Workforce Services (Utah counties) employment data Table 2: Hachman Index Scores for Utah Counties, 2021 State 74.7 -6.5% to 0.0% 74.5 Hachman Index Hachman Index State Salt Lake 94.1 Kane 44.8 Weber 87.1 Grand 44.6 New Hampshire 92.2 Hawaii 72.4 Davis 85.2 Sevier 43.0 South Carolina 91.9 Iowa 70.7 Utah 83.4 San Juan 41.4 Michigan 91.5 Delaware 67.9 Washington 82.3 Garfield 39.4 Tennessee 91.3 Nebraska 67.7 Iron 79.9 Summit 37.5 Wisconsin 91.2 New Mexico 63.5 Tooele 77.3 Daggett 36.8 Alabama 91.1 Oklahoma 58.4 Cache 73.3 Millard 33.7 Maine 91.1 South Dakota 54.5 Wasatch 68.3 Carbon 31.4 Connecticut 90.8 West Virginia 51.2 Juab 66.3 Piute 25.3 Virginia 90.6 District of Columbia 49.3 Sanpete 63.1 Uintah 25.1 Florida 90.5 Wyoming 36.9 Box Elder 55.4 Beaver 22.2 Kansas 90.4 Alaska 36.3 Morgan 52.3 Emery 18.8 Vermont 90.2 North Dakota 35.1 Wayne 50.2 Duchesne 12.9 Rhode Island 89.2 Rich 49.7 Source: Kem C. Gardner Policy Institute analysis of U.S. Bureau of Economic GDP data Source: Kem C. Gardner Policy Institute analysis of Bureau of Labor Statistics (United States) and Utah Department of Workforce Services (Utah counties) employment data I N F O R M E D D E C I S I O N S TM 3 gardner.utah.edu I March 2023 Partners in the Community The following individuals and entities help support the research mission of the Kem C. Gardner Policy Institute. Legacy Partners The Gardner Company Christian and Marie Gardner Family Intermountain Healthcare Clark and Christine Ivory Foundation KSL and Deseret News Larry H. & Gail Miller Family Foundation Mountain America Credit Union Salt Lake City Corporation Salt Lake County University of Utah Health Utah Governor’s Office of Economic Opportunity WCF Insurance Zions Bank Executive Partners Mark and Karen Bouchard Kem C. Gardner Policy Institute Advisory Board Conveners Michael O. 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