Is Colorado a Renewable Energy Hub?

One of the overriding themes of this blog has been the importance to Colorado and the Denver Region's economic health of seizing the moment and becoming a center for the emerging renewable energy sectors. Up until now I have not seen any data which allows us to measure the region's progress in this regard.

The recently released report by the American Solar Energy Society, "Defining, Estimating, and Forecasting The Renewable Energy and Energy Efficiency Industries in the U.S. and Colorado," provides useful data
for understanding if Colorado is succeeding in becoming a green energy hub. According to this report as of 2007 Colorado had 91,285 renewable energy and energy efficiency jobs (10,075 in just renewable energy). In the U.S. as a whole there were 504,000 renewable energy jobs and 9.09 million total renewable and efficiency jobs.

By combining this data on renewable jobs in Colorado and the U.S. with overall data on Colorado and U.S. employment as of December 2007 (138 million and 2.3 millon non-farm jobs in the U.S. and Colorado respectively) its possible to calculate a location quotient(LQ) which shows the concentration of renewable jobs in Colorado.

One way to think about the LQ is it measures the ratio of a state's share of total national jobs in a specific industry to that state's share of total national jobs. So a LQ>1 indicates the state has a greater share of jobs in a specific economic sector than its population would otherwise warrant which means the state is a net "exporter" of the products and services produced by that sector to the rest of the nation (or world). Detroit has a high LQ in automobile manufacturing (at least for now), California has a high LQ for film production, New York in financial services, etc. So a LQ>1 means an area could be a hub or cluster for a given economic sector. Obviously having a high LQ in a growing sector is a good thing for a region's economic health but having a high LQ in a shrinking sector can be disastrous.

Based on the data cited above, Colorado had a LQ of 1.18 in renewable energy jobs in 2007. Given the string of positive job announcements in early 2008 in Colorado in the renewable sector, it seems likely to me that this ratio may have grown in 2008. However, a LQ of 1.18 only indicates a moderate level of concentration and it means Colorado has a long way to go before establishing itself as a primary alternative energy hub and there is likely to be fierce competition from other areas of the country to obtain this status.

(Photos courtesy of the National Renewable Energy Laboratory, All Rights Reserved)

Economic Base Analysis Part II: Location Quotients and Industry Growth Forecasts

In my blog from July 4, 2007, I presented data on the nine county Metro Denver and City and County of Denver location quotients which evaluated which industries are part of the areas' economic bases. In this blog, I combine Metro Denver location quotient data with forecasts of average annual growth rates by industry from 2004 through 2014 from the Bureau of Labor Statistics. This allows me to plot location quotient against economic growth forecasts and create a two by two matrix (see Figure 1 below).

Within the matrix two of the quadrants are particularly useful. Those industries which have location quotients greater than one and positive economic growth forecasts are likely to be positive drivers of the Metro Denver economy (see Quadrant I in Figure 1 and Figure 2 below). Those industries which have location quotients greater than one and negative economic growth forecasts are likely to negatively impact the Metro Denver economy (see Quadrant II in Figure 1 and Figure 3 below) and should be cause for concern among civic leaders and local government officials due to their risk of decline. Note I did not label the specific industries plotted in Figure 1 because the plots are too dense to allow for labels to be legible but the industries in Quadrants I and II with the highest location quotients are listed in Figures 2 and 3 below.

From a high level perspective, the good news for Metro Denver is that there are a lot more industries in Figure 1 Quadrant I/Figure 2 than there are in Figure 1 Quadrant II/Figure 3 which indicates that based on the composition of its economic base, Metro Denver is poised to benefit more from industry growth than it will be harmed by declines.

Figure 1: LQ versus Average Annual Growth

Figure 2: Growth Industries (from Quadrant I)

Figure 2 above shows that the Denver Metro Area economic base is well positioned in a range of knowledge-based, service sector industries which are poised for economic growth including professional and technical services, internet related employment and several financial services sectors among others. It is notable that the BLS forecasts for growth in the air transportation sector are proving to be accurate as shown by the strong performance of Denver International Airport (see my July 30, 2007 blog about DIA's expansion plans).

Figure 3: Industries at Risk for Decline (Quadrant 2)

According to Figure 3, the oil and gas extraction, telecommunications, postal, computer and electronic product manufacturing, and miscellaneous manufacturing sectors are forecasted to decline from 2004 to 2014. The forecast for declines in the oil and gas extraction sector appear to be quite wrong given that the sector has enjoyed a boom throughout the Rocky Mountain West, the nation and the world due to high energy prices and strong global demand.

However, the telecommunications and computer and electronic product manufacturing and miscellaneous manufacturing sectors appear to be sectors that pose the highest risk for declining in the near term and harming Metro Denver's economic health (the Postal sector is very small in terms of total employment). The Metro Denver Economic Development Corporation has correctly recognized the risk to these sectors by identifying “Broadcasting and Telecommunications” and “Information Technology – Hardware” as two of the three “industry clusters” it has “targeted for retention.” (see http://www.metrodenver.org/DenverProfiles/IndustryClusters/IndustryClusters.icm).

I believe, even high technology manufacturing will be increasingly hard to sustain in the Metro Denver Area and the United States as a whole and that manufacturing sectors have the highest risk of contraction of any sector within the metro area economic base. Increasing global competition in manufacturing will continue to take share from U.S. based manufacturers. If this belief is true, this implies that, over the long term, economic development officials should focus their efforts on retention and recruitment of telecommunications related companies, as opposed to companies in other at risk sectors, to achieve maximum benefit for the Denver Metro Area.

Analyzing the Metro Denver Economic Base With the Location Quotient

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.