In the first part of this series, we looked at the why and the how of our new industry clusters. In this part, we look at how we have then grouped the clusters together to offer really rich insight into the strengths, opportunities and threats in local economies.
Dividing industry clusters into local and tradable
Grouping the 4-digit industries into 49 clusters in the way described in Part 1 does two things. Firstly, it makes it far easier to get a handle on what is happening in an economy than trying to make sense of all 563 sector classifications. Secondly, it gives us a much better sense of real economic activity in an area than looking at the higher levels – 1,2 or 3-digit – in the SIC classification system.
However, when we look at the 49 clusters, it becomes clear that there are two distinct kinds:
Local Industry Clusters
These are made up of industries which tend to serve local needs, and which don’t have much in the way of national or international exports. They make up 14 out of the 49 clusters, with examples including retail, health, schools and restaurants.
Tradable Industry Clusters
These are made up of industries that tend to export both nationally and internationally. They make up 35 out of the 49 clusters, and include activities such as manufacturing and business and professional services.
Although there are only 14 local industry clusters, they tend to be the largest employers in each region, simply because they often constitute essential parts of day to day life. By contrast, although there are 35 tradable industries, these tend to be sectors that are focused in particular regions, rather than spread across all areas, and generally tend to employ fewer people than the local clusters. Across Britain as a whole, for instance, in 2016 18.82 million people (63.18%) were employed in local clusters, whilst 10.97 million people (36.82%) were employed in tradable clusters.
Another big difference between the clusters is in pay and productivity. Whereas the local clusters tend to be highly labour-intensive and low paid, the tradable clusters tend to have higher pay and productivity. Evidence also shows that their growth brings sustained ‘multiplier’ effects – that is, they multiply wealth and therefore generate growth throughout a local economy ¹.
For all these reasons, and most especially that by their nature they are creating value to sell across the country and to the wider world, so bringing wealth into the area, it is the tradable clusters that tend to be the real drivers of local economic growth.
How can the industry clusters give you insight into your local economy?
Our data is distinctive for its high level of granularity. This is not just at the sector level, where we have accurate and robust insight down to the 4-digit SIC level, but also in terms of geographical levels too, where we can dig right down to local authority level. What this means is that having defined our industry clusters, we can use them to really lift the lid on what is driving not just the national economy, or even regional economies, but economies at the most local level.
In terms of the metrics we might use to achieve this, we can look at a number of things such as jobs, current job growth and even projections of future job growth. But in terms of being able to articulate and evidence a “proposition” to business, what matters most is being able to determine what it is that makes your location unique. To do this, we use a measurement called Location Quotient (LQ), which is a statistical measure of industry concentration in a particular area when compared to the rest of the country. How we calculate this is as follows:
First, we first measure the number of jobs in an industry within a given area, and then work out the percentage of total jobs it accounts for. We then compare this to the percentage of jobs the sector accounts for across the nation as a whole, assigning the national level a benchmark figure of one, from which the local level figure can be measured against. The resulting figure tells us how much that industry can be considered as a specialisation of the region, with any LQ figure over 1.2 typically meaning that the area being measured has a comparative advantage in that sector.
By way of example, the following table shows the Top 5 tradable industry clusters in a region of the country that is ordinarily known for being home to a lot of businesses in the tech sector. This is borne out by the LQ for the Digital cluster (3.18), but as you can see, the measurement also uncovers a number of other niche sectors including Education and knowledge creation, Downstream chemical, Precision technology, and Passenger transport:
In addition to the LQ figure, we have included a number of other metrics relating to the region, as well as projected growth for Britain as a whole from 2016 to 2021. Put together, this can inform us where there might be opportunities for local economic developers to invest. For example, this particular region has a comparative advantage in the Digital cluster, yet growth in the region is projected to be far lower than growth in the nation as a whole. What this indicates is that focusing efforts on attracting more businesses to the region from the Digital sector over the next few years may well be a good use of resources.
In other words, the data can help identify areas of a local economy that are particular strengths, as well as those that present opportunities, and indeed threats. In the final part of this series, we’ll be looking at some of the potential applications for local authorities and LEPs that are seeking to grow their economy.
¹See e.g. Moretti (2010) and Faggio and Overman (2014).
² You can download a list of the cluster definitions by clicking here.
Find out more about how we can help you grow your local economy by contacting us at firstname.lastname@example.org