Diversification and Specialization Across Urban Areas

Specialization, Size, and Growth

At the other end of the spectrum, some urban areas are characterized by a few large industries that tend to dominate local economic activity. For example, the Napa, Calif., metro area is specialized in wine production, and Gulfport, Miss., is concentrated in petroleum refining and related activities. As described in the previous section, these metropolitan areas may be characterized by strong localization economies that have provided advantages that lead firms within an industry to cluster together geographically. When viewed against national patterns of industry concentration, measured by shares of employment in a particular industry, urban areas can be described by the extent to which they are “specialized.” It turns out that large urban areas, based on total employment, are less specialized (more diverse) and smaller urban areas are more specialized (less diverse), but this does not tell the entire story.

One measure of urban area specialization involves a variation of the Gini index, which is most commonly used to measure income inequality. The Gini specialization index (GSI) is equal to zero if the employment shares for all industries in the area match those in the nation, but it approaches a value of 1.0 if the area is fully specialized in a single industry that is very small in the nation as whole. This index is directly related to the inverse of the RDI, so areas with high GSIs should have comparably low RDIs.

Using the GSI as a measure of specialization, Duranton and Puga, in a 2005 article in the Journal of Urban Economics, explored the change in industrial specialization over time and also across population size categories within a given year. They found that industrial specialization has declined over time, from 1977 to 1997, and that the degree of specialization at a given point in time was largest, on average, for smaller urban areas. We used 2015 data at the three-digit NAICS level to replicate their work and found that the relationship still holds — smaller urban areas are more specialized on average, as indicated by a larger GSI, than urban areas with greater population. (See chart below.)

Can Diverse Metros Have Specialized Industries?

Our analysis, and the work of Duranton and Puga, shows that an area can be diverse in its industrial composition and at the same time have one or more highly specialized industries. The previous measures we have described here, the RDI and GSI, are broad measures of relative diversity or specialization, respectively. They are calculated with data from all industries in order to provide a single measurement for an urban area, comparing the pattern of employment across all industries to the national pattern. But it is also useful to understand the concentration of an individual industry within a single area relative to its concentration nationally. For this, we need a new measure: The location quotient (LQ) measures how concentrated a single industry is in an area by comparing shares of employment (or some other measure of economic activity) in that area with the same industry's share in the nation. Using shares of employment makes it easier to compare areas of different size, which would not be possible by comparing employment numbers directly. For example, an LQ of 2.0 means the industry is twice as concentrated in the urban area as in the nation, while an LQ of 0.5 means it is only half as concentrated. If the LQ equals 1.0, then the United States and the area of comparison must have the same relative industry concentration. These comparisons of LQs have the same interpretation no matter how large or small the urban areas and provide an easy way to compare industry concentration across urban areas, all relative to the nation.

Using the LQ measure to reveal specialized industries, it is possible for an area to be highly diverse, based on its RDI, even though some industries in that area are highly concentrated when compared to their employment shares in the nation as a whole. For example, the Chicago metro area is the second most diverse area in the United States as measured by the RDI, but employment in funds, trusts, and related financial activities is more than four times as concentrated in Chicago as in the United States. (See table below.) This is possible because the relative size of the industry matters for the RDI. The funds and trusts industry accounts for only two-hundredths of a percent of employment in the Chicago metro area, but this is still significantly larger than the share of U.S. employment in that industry. Because this industry is so small, it has little impact on the RDI, and total diversity in the region can be high even though that industry is highly concentrated in Chicago according to the LQ.

The fact that metro areas can be simultaneously diverse and specialized (when narrowly defined) explains why even in large metropolitan areas, policymakers often define target industry clusters for the purpose of economic development marketing. The Boston area promotes the diversity of its economy (with an RDI of 2.97, ranked 81 out of 917 in our data) at the same time that it highlights its concentration of several industry segments such as financial services, information technology, health care, manufacturing, and tourism. Fittingly, our calculations show that the Boston metro area is relatively specialized in some of these fields. Two financial industries (funds, trusts, and other financial vehicles; securities, commodities, and other financial investments) are tied for the second-highest LQ in Boston at 2.6. Other specialized industries (as measured by LQ) that Boston boasts of include educational services, non-Internet publishing, data processing and hosting, computer and electronics manufacturing, and other information services, all of which are at least twice as concentrated in Boston as in the nation. In particular, Boston has been vying with San Francisco in claiming a position as the premier biotech hub. San Francisco, compared to Boston, measures as slightly more diverse overall, with an RDI of 3.25. But when comparing individual industries, San Francisco appears far more specialized than Boston, with an LQ of 3.3 in non-Internet publishing, 4.4 in data processing and hosting, and an impressive 8.2 for other information services. Both metro areas benefit from a density of colleges and universities and the ability to attract college graduates and scientific talent, which are important contributors to knowledge transfer spillovers.

Industry Diversity in the Fifth District

Urban areas in the Fifth District are distributed across the diversity spectrum. For example, Charlotte, N.C., is one of the most diverse metro areas in the nation, ranked 11, while Bennettsville, S.C., is one of the least diverse, ranked 902 out of 917 urban areas. (See chart below.) When compared to urban areas across the nation, areas in the Fifth District are slightly more diverse than average, with a mean RDI of 2.0 in the Fifth District versus 1.9 for the United States, but this difference is likely not significant. 

Among Fifth District urban areas, Charlotte has the greatest industry diversity, with an RDI of 4.6. Rounding out the top five diverse urban areas in the Fifth District, Charlotte is followed by Richmond, Va.; Raleigh, N.C.; Baltimore, Md.; and Columbia, S.C. The largest urban area in the Fifth District, Washington, D.C., ranks 19th within the district in diversity and 157th nationally. The Washington, D.C., metro area is not a typical large urban area, however, in view of the strong presence of the federal government and federal government contractors.

The Charlotte metro area serves as a good example of many of the complexities involved in discussing diversity and specialization. The most specialized industry in Charlotte, based on the LQ, is textile mills, which is more than seven times as concentrated in Charlotte as in the nation as a whole. Yet Charlotte is not particularly known for its textiles, which represent less than 1 percent of employment in the area. Bennettsville, the most specialized area in the Fifth District based on its low RDI value, also has its highest LQ in textile mills. But in Bennettsville, they account for approximately 15 percent of employment, with a concentration more than 177 times as strong as in the nation. This illustrates that areas differing widely in our broadest measure of industry diversity can be quite similar in terms of their most concentrated industries – in this case, textile mills. Yet the textile mill industry plays a much more significant role in Bennettsville than it does in Charlotte. Charlotte is better known for its financial sector, which is much larger than textiles despite appearing less concentrated by LQ. Credit intermediation services account for more than 50,000 jobs in the area and have the third-highest LQ in Charlotte at 2.4. Importantly, these financial jobs are supported by a wide array of other business services that provide agglomeration economies, while also making Charlotte one of the most diverse urban areas in the Fifth District and the nation.

As previously mentioned, it is notable that the Fifth District has a high concentration in the textile mills industry. Of the 87 urban areas in the district, the textile mills industry has the highest LQ in 25 of them. The next most common industry is mining (excluding oil and gas), which has the highest LQ in seven urban areas. Despite this concentration, the Fifth District does not appear more specialized, overall, than the nation as a whole, likely because these industries are relatively small. In the 25 urban areas where textile mills are the most concentrated industry, the average employment share of that industry is only 2.5 percent, so this does not have a large impact on diversity measures across all industries.

Conclusion

Urban areas vary in size and in industry composition across the nation, with some having a diverse mix of industries and others being relatively more specialized. Past economic research has found that measures of relative industry diversity increase with the population size of metropolitan areas. This makes sense because larger urban settings provide the backdrop for beneficial "urbanization economies" that occur when an industry experiences production or cost advantages from close proximity to a variety of other industries such as a range of business activities or improved transportation networks. In contrast, smaller urban areas tend to be more specialized. Our analysis confirms that this relationship between population size and industry diversity still holds true, both across the nation and within the Fifth District.

Interestingly, diversity and specialization are not mutually exclusive, as large and diverse urban areas can be specialized in one or more particular industries. This is easily seen by examining LQs, or the concentration of a particular industry in an urban area relative to that same industry's concentration in the nation. In general, the pattern of diversity and specialization in the Fifth District mimics the national pattern, with increasing measures of diversification as we move along the spectrum from Bennettsville, S.C., its smallest urban area, to Charlotte, N.C., one of its largest.