Seeds of Change

By Kyle Uphoff
March 2010

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Minnesota’s distinguishing industries — those that have a greater share of employment than the rest of the country — are constantly shifting, depending on economic trends.

The recent economic crisis has generated much attention around industries that define our states. The collapse of the automotive industry has been blamed for the double-digit unemployment rates in Michigan and the manufacturing malaise that has spread across neighboring states like Indiana and Ohio. States with significant energy resources such as North Dakota and Texas have been hit less hard, while tech-heavy California is witnessing its worst economic conditions in decades. 

The potential for a state to weather poor economic conditions or flourish in good times is determined in part by its distinguishing industries — that group of industries that set states apart from each other. In Minnesota, medical devices, taconite or wood products come to mind. 

While the years between 2001 and 2008 were not considered highly dynamic in terms of Minnesota’s employment growth, the state’s distinguishing industries have been in a state of transformation that has brought us to our current situation and will shape our future.

What Is a Distinguishing Industry?

An industry is defined as distinguishing by its location quotient (LQ). An LQ that is greater than 1.0 means that the share of employment in that industry in a region is higher than the average share for the rest of the country. 

Medical device manufacturing is a good example. Minnesota has a concentration of workers in this industry that is 10 times the concentration in the United States as a whole.

An LQ of 1.0 indicates that a region has the same percent of employment in an industry as the nation. Service industries that serve a region such as hospitals, restaurants or retail stores tend to have an LQ of 1.0.

An LQ of less than 1.0 indicates an industry has a lower share of employment than the rest of the nation. Oil drilling or tobacco farming would be examples of such industries in Minnesota. 

These distinguishing industries tell much about the economic performance of a region. A high concentration of dot-com firms in the 1990s would have meant high growth for the state but would have also spelled out heavier job losses in the 2001 recession. Many states look to the prospect of manufacturing green technologies such as wind turbines or solar arrays as a strategy for future economic success.

Table 1 lists the largest distinguishing industries in Minnesota. The list includes nine manufacturing industries, two transportation industries and two natural resource-based industries (animal production and mining). 

There are several service industries that typically pay high wages such as management of companies (corporate headquarters), insurance carriers and publishing. Three industries have a direct role in maintaining the state’s quality of life — nursing and residential care facilities, social assistance and membership organizations (such as religious, grant-making and civic organizations).

Two industries represent the sort of high-tech industries that experienced high growth in the 1990s — Internet service providers, search portals and data processing, and electronic markets agents and brokers (firms that buy and sell goods using the Internet or other electronic mechanisms).

Are these good industries to have in a state?  These industries have been affected by economic conditions differently, with some growing and others shrinking.

Most of the goods-producing industries on the list (manufacturing, mining and agriculture) lost jobs between 2001 and 2008. Only miscellaneous manufacturing grew because of a high concentration of jobs in medical supplies manufacturing — an industry subsector with a growing presence within the miscellaneous manufacturing sector. 

Similarly, more jobs would have been lost in computer and electronic product manufacturing if it weren’t for a strong medical device manufacturing component that buoyed up the larger industry category. Most of the losses were experienced in 2008 with the onset of the recession. 

In other cases, however, such as machinery manufacturing, losses took place for years leading up to the recession. These employment losses are due to a variety of factors, including a downturn in demand for products. But productivity enhancements also play a major role in lowering employee counts and shifting the occupational makeup of firms.

Even though manufacturing shed about 42,700 jobs between 2001 and 2008, the industry is of interest because of the high wages and opportunities it provides to Minnesotans possessing various skill sets. Of the goods-producing industries on Table 1, only wood product manufacturing, furniture manufacturing and animal production pay an average weekly wage of less than the total employment average of $881. 

The service sector displays a mixture of growing and declining industries. Some industries that pay higher-than-average wages such as management of companies, insurance carriers and electronic markets have grown in recent years, while publishing, air transportation and Internet service providers, search portals and data processing witnessed job losses. A number of lower-paying industries such as social assistance and nursing and residential care facilities grew, while gas stations and membership organizations declined. 

Over time, location quotients can grow or shrink, making an industry more or less distinguishing to a state. For instance, the LQ for printing grew 21.6 percent between 2001 and 2008. The industry, however, lost 2,141 jobs. This is an indication that while Minnesota lost jobs in printing, those losses were less pronounced than in the United States as a whole. Similar conditions play out for computer and electronics, fabricated metals, wood products and publishing.

Ideally, an industry would have both positive employment and LQ growth as in the cases of animal production, management of companies and miscellaneous manufacturing. At the other end of the spectrum are industries losing employment and LQ, including air transportation and mining. These industries are losing jobs at a faster rate in Minnesota than in the nation or they may be losing jobs while the nation gains.

The shifting of Minnesota’s industry landscape is evident in the ranking of various industries.  While printing held the top LQ spot in both 2001 and 2008, other industries have moved up, such as computer and electronic manufacturing and miscellaneous manufacturing. Most of the growth came from an emphasis on medical manufacturing components in each of these industries.

Other industries have declined such as machinery manufacturing and food manufacturing. It should be noted that industries with shrinking LQs or lower rankings are not always completely in decline. If Minnesota industry has invested in new technologies at a faster rate than the nation, productivity enhancements may have diminished the need for workers and set those firms on a firmer footing for future hiring.

Setting the Stage

Industries with rapidly increasing LQs are of particular interest because of their potential to define the state’s future industry landscape. Table 2 lists industries with the fastest rates of recent growth. Some industries are well-established in the state and have increasing LQs because they are doing well relative to the national market (such as printing and social assistance) or have rapidly expanding industry subsectors relating to medical manufacturing (miscellaneous and computer and electronic product manufacturing). 

Other industries exhibit fast growth but are not yet considered distinguishing (with an LQ of less than 1.0). Chemical manufacturing has expanded rapidly because of job creation in ethanol production, though the larger industry still lags the nation in its concentration of employment.  Health care (hospitals and nursing and residential care facilities) is making up a larger share of statewide employment, perhaps reflecting the aging of our state.

Just as some industries are making up a larger share of state employment, others are shrinking.  Table 3 lists industries with the largest decreases in LQ. Non-store retailers (such as electronic shopping and mail order firms like Fingerhut), financial investment firms and mining companies were among industries with some of the highest LQs in 2001. Two recessions later, these industries have shed jobs and share of statewide employment. 

The downturn in the construction industry is especially evident, with two construction sectors and building material and garden supply stores taking particularly large hits. Employment and housing price statistics indicate that the housing market began to collapse earlier in Minnesota than the rest of the country, and these figures seem to bear that out. A construction recovery relatively stronger than the nation could reverse these losses.

One question is whether the state’s most distinguishing industries supply good jobs. Figure 1 displays the average weekly wages of industries by their change in LQ. Industries that have lost 50 percent or more of their LQ (becoming less distinguishing) have an average weekly wage of $1,003 compared with $961 for industries with an LQ that has grown 50 percent or more since 2001 — a difference of $42 a week. While this represents a fairly large wage difference between the fastest growing and declining industries, the average weekly wage for all industries with a growing LQ is $913 compared with $856 for declining industries. Not surprisingly, those industries with expanding LQs added 187,418 jobs to the economy between 2001 and 2008 compared with a loss of 125,438 for industries that are less distinguishing.

Tables 2 and 3 show a set of relatively broad industries. As noted in the case of miscellaneous manufacturing with its strong medical supplies component, smaller industry subsectors can greatly impact larger industries. 

Indeed, it is possible to have a large industry with a shrinking LQ while some smaller subsectors within that category might exhibit high growth and provide future opportunities. Table 4 lists those specific industry subsectors with the highest LQ that employ 500 or more people. The list shows three agricultural sectors as well as metal ore (iron) mining.  Manufacturing is represented by computers and peripherals produced by firms such as IBM and Seagate. Electromedical devices (pacemakers) and other medical supplies display the strength of the state’s medical manufacturing sectors. Other transportation manufacturing represents the state’s strength in snowmobile and ATV manufacturing.

Manufacturing is well-represented in those industries with growing LQs. While the state is not known for its strength in aerospace or pharmaceutical manufacturing, the data show that these industries have been taking an increasing share of the state’s employment even though they are still relatively small compared with the United States.

Growth in basic chemical manufacturing derives from the state’s recently burgeoning ethanol industry. Health care is represented by the presence of residential care facilities and community elder care. Entertainment and tourism is represented by gambling and promoters of arts and sports.

Those industries showing the greatest losses are distributed across a variety of sectors, though services to business are particularly well-represented. Declines in facilities support, local messengers and delivery, commercial machinery and equipment rental and leasing, and business, computer and management training likely represent a downturn in business demand for such services due to the recession. Indeed, employment in a variety of business services started to decline in Minnesota sooner than the rest of the country in the early phases of the recession.

Creative Destruction at Work

The importance of distinguishing industries in defining economic vitality and workforce needs becomes even more pronounced at the substate level. While mining and ATV manufacturing represent fairly small industries statewide, they have extreme importance in northeastern and northwestern Minnesota.

When the effects of the recession are finally tallied, some industries will have a diminished presence in the state. Those results will be felt particularly acutely at the regional level and will have a direct impact on future economic and demographic growth. Industries that survive this recession are likely to change, creating new products or seeking out new markets. In any case, they will likely need workers with new skills and may even have new infrastructure requirements. 

The economic vitality of Minnesota’s regions will depend upon their potential to nurture their established industries while creating the conditions for new industries to grow. 

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