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Location Quotient Analysis: Strengths and Weaknesses of the Local Economy

By: Sam Bailey, NLEA/DTE Energy Foundation Graduate Intern ‘21

What Makes up the Economy?

The precursor to economic development is the simple question: What makes up the economy? In order to do the work of economic development–attracting businesses, increasing average incomes, educating and training new workers, supporting community growth, and more–one must understand what industries make up a local economy in order to support, grow, and advocate for that locality. Location Quotient (LQ) analysis of Antrim, Charlevoix, Cheboygan, and Emmet Counties reveals the rapid growth of Beverage and Tobacco Manufacturing, the importance of manufacturing, and a heavy reliance on tourism-based industries. A location quotient is a measure of how concentrated an industry is, calculated by putting the ratio of a single industry in the local economy over that industry in the national economy. For example, if you wanted to calculate the employment location quotient for a county, the equation would be the following:

LQ equation

How the Data was Measured

Using data provided by the US Bureau of Labor Statistics (BLS), one can utilize LQs–in combination with other metrics–to begin to understand what makes up a county’s economy. According to Networks Northwest–the central regional planning authority for Michigan Prosperity Region 2–knowing the LQ score of various industries can help local units of government, “1) to determine which industries make the local economy unique, 2) to identify which industries the locality is exporting, 3) to identify emerging export industries that are starting to bring economic activity into the local market, and 4) to identify export industries that have the potential to threaten the region’s economic base.” Because LQs are a relative measurement of two ratios, they can be difficult to digest. However, it boils down to this: a LQ of 1.0 means that the concentration of that industry in the county is equal to the concentration of that industry in the entire US; a LQ above 1.0 means an industry has a higher concentration in the area than the national economy; and a LQ below 1.0 means an industry has a lower concentration in the area than the national economy. Thriving communities typically aim to have multiple industries with a LQ greater than 1.0, because it means that the area is not too reliant on any one industry.

LQ analysis was conducted for Antrim, Charlevoix, Cheboygan, and Emmet Counties for each year from 2016 to 2020 utilizing data from the BLS. In the documents below, one can view tables with the data provided by the bureau for each county–dollar amounts are not adjusted for inflation. Due to the small size of some industries in a county’s economy, their data was suppressed by the BLS to prevent the release of personally identifiable information. Suppressed industries were excluded from the tables, but if interested in seeing the full list of industries active in the region, please contact info@northernlakes.net.

Fastest Growing: Beverage and Tobacco Manufacturing

The fastest growing industry in Northern Michigan is Beverage and Tobacco Manufacturing. In Emmet County alone, the industry increased its employment LQ from 1.7 to 3.23 in the last five years, added four new establishments, and more than doubled its number of employees, all in just the last five years. The industries employment LQ in Antrim County rose from 1.22 in 2016 to 4.40 in 2020, making it one of the top five industries for the county in four out of the last five years. Additionally, the number of establishments in the county increased from three to six in that same timeframe. Charlevoix County added two new Beverage and Tobacco Manufacturing establishments as well. The beverage manufacturing sector is growing around the country but based on LQs, the region is exceeding the national growth rate. The proliferation of breweries, distilleries, and wineries creates the additional opportunity to build up the sectors that support them: farming, distribution, marketing, and more. Local community and business leaders need to recognize the industry’s growth and leverage it to help grow its associated industries.

More Manufacturing

In both 2018 and 2019 there were more than 175 manufacturing firms in Antrim, Charlevoix, Cheboygan, and Emmet Counties which supported more than 5,000 jobs; it’s the third largest industry by employment in the region. Antrim County has high employment LQs in Machinery Manufacturing, Food Manufacturing, and Fabricated Metal Product Manufacturing of 6.44, 3.17, and 1.99 respectively in 2020. Charlevoix County has high employment LQs in Plastics and Rubber Products Manufacturing, Computer and Electronic Product Manufacturing, and Machinery Manufacturing of 19.74, 3.56, and 2.45 respectively in 2020. These metrics do not include the many operations across the region which produce apparel, chemicals, transportation equipment, wood products, and more. The manufacturing sector is integral to the local economy as it brings revenue to Northern Michigan from outside the community, state, and country. The average wage in the region’s manufacturing industry was $55,953 in 2019, making it one of the highest paying industries in Northern Michigan. Despite the diversity of work and high compensation, local manufacturers are facing the same challenges as every other business in the area… finding labor. Unfortunately, the labor shortage in Northern Michigan is not a short term trend. Given the prevalence of manufacturing and its importance to the local economy, community leaders should be working to keep these businesses in the area. A potential avenue to address a shrinking labor force is to support the adoption of Industry 4.0. Utilizing artificial intelligence, robotics, automation, and data analytics, local manufacturers will be able increase output despite a shrinking labor force. In turn, local manufactures will remain competitive globally while also remaining in Northern Michigan communities, keeping manufacturing jobs local.

What About Tourism?

When viewing Northern Michigan as a whole, many of the top industries (Accommodation; Food Services and Dining Places; Amusement, Gambling, and Recreation Industries; Retail; and more) rely on tourism which poses three challenges. First, the Great Recession and current COVID-19 pandemic have demonstrated that tourism is not guaranteed and any substantive change in the number of visitors to the area has serious implications. Second, tourism-related industries typically provide relatively low wages. Finally, a reliance on tourism contributes to fluctuations in the region’s unemployment rate, which regularly peaks above 8% in the winter before falling to approximately 4% in the summer. By diversifying the local economy and cultivating new industries, Northern Michigan can protect itself from events which threaten tourism, increase wages, and contribute to more year round employment.

Conclusion

Location Quotient analysis of Northern Michigan reveals the growth of Beverage and Tobacco Manufacturing, the importance of manufacturing, and a heavy reliance on tourism-based industries. As community and business leaders discuss the county’s future, it is important to understand which industry sectors are a strength and which are a weakness in order to identify sectors with growth potential and those that need support.

Industry Analysis by County

Industry Analysis – Antrim County
Industry Analysis – Charlevoix County
Industry Analysis – Cheboygan County
Industry Analysis – Emmet County

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