Metropolitan areas have groups of vertically and horizontally related businesses that form important “industry sectors” or “clusters” in the local economy. Understanding what these sectors are; how important they are to the city’s overall urban economy, what causes specific firms and sectors to locate in one city versus another; which new clusters have the best chance of taking root in a given city, and what public policy and other mechanisms help cultivate and strengthen clusters are key aspects of economic development practice.
I intend this to be the first in a series of blog entries exploring various aspects of Metro Denver’s industrial clusters. This entry limits itself primarily to the logical initial questions of “what are the most important employment sectors to the Metro Denver economy?” and “which industries are key components of the Denver economic base?” Subsequent entries will analyze the data provided in this entry and will address broader economic development questions specified in the first paragraph above.
The most interesting parts of this blog entry are the industry graphs and tables showing which sectors are most important to the Denver economy so I wanted to present this data in the early part of the blog entry and the provide explanation of how and why this data was developed later in the entry.
To provide a some high level information on which sectors provide employment in Metro Denver see the two graphs below which provide a breakdown of total employment percentage by industry supersector in Metro Denver. Note “supersectors” defined by the federal government and group the U.S economy into ten broad industry sectors.
Employment Percentages by Supersector
in the Nine Country Metro Denver Region in 2005
Source: Bureau of Labor Statistics
Employment Percentages by Supersector
in the City and County of Denver in 2005
Source: Bureau of Labor Statistics
When analyzing a metropolitan economy its not enough to show the broad breakdown of employment by supersector, you also need to understand, on a more granular level, which specific industry sub-sectors are part of the area’s economic base. I provide a more complete definition of economic base and the theory behind it later in the blog, but for now, think of a city’s economic base as those industries which “export” goods and services to markets outside the metropolitan economy.
Using an economic technique called the “location quotient” and a data analysis tool from the Bureau of Labor Statistics (BLS), I have estimated which industry sectors in the nine county Metro Denver Region and the City and County of Denver are part of the economic base and ranked the 15 industries with the largest location quotients.
Economic Sub-Sectors Ranked by Location Quotient
in Nine County Metro Denver in 2005
Source Bureau of Labor Statistics
Economic Sub-Sectors Ranked by Location Quotient
in the City and County of Denver in 2005
Source: Bureau of Labor Statistics
The analysis presented in this blog is based on “economic base theory” which postulates that cities have “export” sectors that produce many of their goods and services for consumers outside of the city and other sectors that primarily supply the local residential population in the city. The export sectors, also known as the economic base, are critically important to the city’s overall economic strength and vitality because they are able to penetrate markets beyond the city’s geographic boarders and bring new income into the city. Export sector income, interacts with the intra-city economy to create a multiplier effect that raises income and employment throughout the metropolitan economy. Economically healthy cities need a strong economic base as well as vibrant local support sectors.
When analyzing a city like Denver’s economic base, one readily available tool is the location quotient (LQ) which attempts to measure which economic sectors are net exporters by analyzing the composition of the city’s workforce from publically available data sources. The LQ is an intimidating sounding term but in reality it is quite simple. The basic concept underlying the LQ is that those sectors where the city has a higher concentration of employment than the United States as a whole does, are export sectors (part of the city’s economic base). Because the city has a higher than average employment in the sector it must be producing more goods and services than the local population can consume. The automobile industry in Detroit is classic example, because the “Motor City” has a higher than average concentration of autoworkers, so Detroit must be building cars for “export” to other cities. The location quotient is defined by the following formula:
The variables in the equation above stand for the following: TEc = total employment in a city, IEc = employment in a specific industry in a city, TEn = total employment in the nation, IEn = employment in a specific industry in the nation. %IEc = percent industry employment concentration in a city and %IEn = percent industry employment concentration in the nation.
· If the LQ > 1, than an industry is in a city’s economic base because the city employs a higher proportion of people in that industry than the country as a whole does and so the city must be exporting their surplus products or services which are not being consumed locally.
· A LQ =1 indicates the city is roughly self sufficient in a given industry and is not a net exporter or importer of that product or service.
· An LQ of <1 indicates that an industry is not in a city's economic base and the city is a net importer of goods and services produced by that industry. Industries with LQs which are less than 1, such as .8, may still be considered part of a city’s economic base because it can be difficult to define industry clusters with the necessary amount of specificity to use "1" as the boundry.
The underlying data used in this blog entry comes from the BLS quarterly census of employment and wages. Industry sectors are classified based on the North American Industry Classification System (NAICS), a standard used by government agencies and are reported at the supersector level of detail (breaking the economy into 10 different components) in the pie charts and at the sub-sector, or 3 digit, level of detail (breaking the economy into 92 different industry sectors) in the tables.
This blog entry was getting so long that I decided to provide analysis of the information contained in the entry in a later entry.
There was great news today for Metro Denver economic development wonks. Jeff Leib’s article in the Denver Post, “$1.2 billion makeover for DIA” (http://www.denverpost.com/news/ci_6496074 ), explains that Denver is issuing municipal revenue bonds to pay for major airport expansion items such as new gates, a commuter jet terminal, a new automated baggage system (sound familiar?), the FasTracks commuter rail station at DIA, and additional parking facilities. I plan to devote a future blog about design considerations for Denver’s “Train to Plane” rail connection. 
DIA is expanding its facilities and infrastructure to accommodate increasing traffic. This is an important milestone in the history of aviation in Denver. DIA was envisioned as an economic development engine for Denver in much the same way as DFW airport is for the Dallas Metro Area. Building DIA was always a strategically sound idea based on the fact that Denver’s location, between the population centers on the West Coast and the Midwest, makes it a natural transportation hub (see my blog from July 13, 2007, “Spatial Isolation and Punching Above Denver’s (Population) Weight”) . Denver needed an airport farther away from the urban core of the city with room to expand as traffic increased and with space for appropriately sized and configured runways to handle weather related challenges in Denver. DIA is one of the few major airports in the country with plenty of room to expand its facilities and with flight paths into and out of the airport over relatively sparsely populated land. I personally fly Jet Blue out of John F. Kennedy Airport in New York regularly and as Jet Blue has grown and expanded, the airspace around JFK has gotten so congested that flights regularly suffer from serious delays. This summer in particular has been a nightmare. Reducing this congestion will be a really hard thing to do for JFK and most other large airports in the United States because they can’t expand the same way DIA can.
DIA suffered a number of set backs early in its history including the abandonment of the Denver hub by Continental Airlines and problems getting the first attempt at an automated baggage system running. Just as air travel industry was hitting stride in Denver, the events of 911 and the resulting airline financial problems sent the whole industry into a downward economic trajectory. However, Denver’s natural strategic advantages as an air transportation hub have allowed DIA to steadily build into a powerhouse as United Airlines retained Denver as a hub, Frontier Airlines was launched from a base at DIA and has expanded tremendously and more recently as South West Airlines has aggressively entered the market. The airline industry will always have cyclical ups and downs and Denver needs to be prepared for the downturn which will eventually follow today’s boom in travel, but DIA is positioned to play an increasingly prominent role in the national air transport system and to help drive the Denver Metro Area’s economic growth.
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