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Industrial Structure Analysis of
Birmingham, Alabama
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Jordan Snelling
URSP 662
Dr. John Accordino
Wednesday, October 6, 2009
Assignment #2
Snelling 1
A) Introduction
When a national economy enters a recession, people often assume that their economies at
the local levels are unstable as well. However, economic fluctuations often skew people’s views
of economies that are actually relatively secure. The best method of determining the health of an
economy without the implications of the business cycle is an Industrial Structure Analysis. Such
an analysis includes an Economic Base Analysis, which determines the stability of an economy
by analyzing which industries export their goods or services. Economic base analysis is an
important tool, because it determines an economy’s vulnerability to changing economic
circumstances elsewhere. At the local level, an economic base analysis will determine how well
a local economy can withstand fluctuations in the national economy.
This paper will analyze the industrial structure of Birmingham, Alabama, which has
undergone several economic renovations throughout its relatively short history. The Birmingham
Metropolitan Statistical Area (MSA) began as primarily a shipping center, developed into a
manufacturing hub, and recently transformed into an economy of healthcare, insurance, and
other services. This paper will discuss the status of Birmingham’s current economy, and attempt
to determine its stability for the future.
B) Basic Industries
When looking at a local economy such as Birmingham, it is important to first assess the
economic base, or the industries in the economy that export goods and services out of the
economy while bringing money in. To clarify, the economic base consists of all industries with a
Location Quotient greater than 1, which means that those industries produce goods and services
greater than the needs of their local economy, and therefore, they export the excess to external
economies.1
In Birmingham, there are 32 industries that are considered to be in the economic base.
The table below inventories the ten industries in the base with the greatest Location Quotients.
The largest Location Quotient is 5.44 for Funds, Trusts, and Other Financial Vehicle. Within this
industry, almost all employment comes from real estate investment trusts. This reflects the recent
1
Galambos, E. C., & Schreiber, A. F. (1978). Economic Base: What our jobs are tied to.
Snelling 2
transition in Birmingham to a more service oriented economy. Birmingham’s economic shift has
concentrated in the industries of insurance and communications, both of which are in
Birmingham’s economic base. The insurance industry is comprised of numerous sub-industries
such as insurance brokerages and carriers, while the communications industry is primarily radio
and television broadcasters. Another important base industry is utilities, which in the
Birmingham MSA refers primarily to electric power generation and distribution.
In addition, the economic base is comprised of three manufacturing industries, which
reflect Birmingham’s economic history, which has not been completely replaced. The
manufacturing industries in the base include Petroleum and Coal Products, Primary Metal
Industries, and Nonmetallic Mineral Products. The largest establishments within these industries
are asphalt paving and roofing materials manufacturers, iron, steel, and ferroalloy manufacturers,
and clay and brick manufactures. These economic changes reflected in Birmingham’s economic
base occurred in response to the end of big iron and steel in the United States, and the dwindling
demand for American metals. The impacts of these changes have been overwhelmingly positive
for Birmingham, because it forced the city to diversity the economic base, which will be
discussed later in this paper.
NAICS
Code
525
324
331
221
513
233
486
327
521
524
Industry
Funds, Trusts & Financial Vehicles
Petroleum & Coal Products
Primary Metal Industries
Utilities (electric, nuclear, etc.)
Broadcasting & Telecommunications
Building, Developing & General Contracting
Pipelines, Except Natural Gas
Nonmetallic Mineral Products
Monetary Authorities- Central Bank
Insurance Carriers & Related Activities
Figure 1. Industries by Location Quotient
Source: County Business Patterns 2000
Location
Quotient
5.44
4.11
3.20
2.54
2.04
1.94
1.85
1.84
1.79
1.75
% Of Total Local
Employment
0.2%
0.4%
1.7%
1.5%
2.9%
2.7%
0.1%
0.8%
0.0%
3.5%
Snelling 3
C) Large Industries
The largest industry, or the largest employer, in Birmingham is Administrative and
Support Services, which employs roughly 8.6% of the total local workforce. Another large
industry in Birmingham’s economy is Hospitals and Ambulatory Health Care Services, who
together comprise 9.7% of the total local employment. The large employment in the Health Care
and Social Assistance sector can be partially contributed to the opening of the University
Hospital at the University of Alabama at Birmingham, which is a substantial employer for
medical treatment and medical research. Figure 2 below lists the largest industries ranked by
total local employment.
While service jobs in the insurance and finance industries constitute a large part of the
economic base, most of Birmingham’s largest employers fall outside of the most economically
important industries. The only 3-digit NAICS industry amongst both the top ten basic industries
and large industries is #524, Insurance Carriers and Related Activities. Industry #524 consists
primarily of direct life insurance, direct health and medical insurance, and direct property and
casualty insurance. Employment in this industry is 15,435, which is approximately 3.5% of the
total local employment. The Location Quotient for this industry is 1.75, which means that these
establishments in Birmingham most likely export insurance to other local economies outside the
Birmingham MSA. This Industry is highlighted on Figure 2 in green.
The apparent difference between basic industries and large industries can be understood
by first acknowledging that it is important to have industries that export their goods and services.
By exporting, industries are able to bring additional income and growth to the economy. In
Birmingham, food and drinking establishments employ large numbers, but they mainly serve
residents in the local economy, which means that the money is circulating from people in the
local economy, instead of being brought in from residents of other economies. On the other hand,
insurance companies serve people across the country, and therefore, they bring revenue in
Birmingham from thousands of other local economies. Highlighted in grey on Figure 2 are the
Location Quotients for the only two of the largest industries in Birmingham that are not in the
economic base: Food Services and Drinking Places and Professional, Scientific, and Technical
Services.
Snelling 4
NAICS
Code
561
722
541
622
421
621
235
522
524
551
Industry
Administrative & Support Services
Food Services & Drinking Places
Professional, Scientific, and Technical
Services
Hospitals
Wholesale Trade: Durable Goods
Ambulatory Health Care Services
Special Trade Contractors
Credit Intermediation & Related Activities
Insurance Carriers & Related Activities
Management of Companies & Enterprises
37,884
26,420
33,863
% Of Total Local
Employment
8.6%
6.0%
5.2%
Location
Quotient
1.11
0.85
0.87
22,774
20,011
19,762
18,174
15,787
15,435
14,970
5.2%
4.6%
4.5%
4.1%
3.6%
3.5%
3.4%
1.18
1.43
1.12
1.16
1.49
1.75
1.35
Employment
Figure 2. Industries by Employment
Source: County Business Patterns 2000
D) Export Base Employment Multiplier
The Export Base Employment Multiplier is utilized in economic base analysis, to
determine the relationship between the base economy and the total economy with regards to
employment2. The multiplier describes how many jobs would be lost from the total local
employment, for every job lost in the base economy. The base economy is the root of growth and
revenue for a local economy, and therefore, each job lost in the base economy results in further
jobs being lost in the non-base. For Birmingham, the total local employment is 439,579, while
the base employment is 286,533. Therefore, the Export Base Employment Multiplier is 1.5. This
Multiplier means that for every two jobs lost in Birmingham’s base economy, another single job
will be lost from industries in the non-base. In Birmingham, this means that job losses in the base
will equate to roughly 1.5 times those jobs lost when looking at the total economy.
2
Galambos, E. C., & Schreiber, A. F. (1978). Economic Base: What our jobs are tied to.
Snelling 5
E) Diversity in the Base
As mentioned earlier, there are 32 industries in Birmingham’s economic base. Of these
industries, three are construction-related, six are manufacturing, three are retail trade, three are
transportation and warehousing, and four are finance or insurance. In addition, Birmingham’s
economic base includes industries in agriculture, mining, wholesale trade, telecommunications,
management and administrative services, healthcare, and other services. Therefore,
Birmingham’s economic base appears to be fairly diverse, considering the relatively small size of
the overall economy. The economic base includes industries in two-thirds of the economic
sectors, which implies that there is a healthy spread of base activity amongst different types of
industries. Furthermore, the economic base includes a large number of service industries, which
are less likely to be negatively impacted by fluctuations in the business cycle. Therefore, due to
the presence of service, Birmingham is more insulated from the impacts from the national
economy.
While its economy has diversified significantly in the past twenty years, Birmingham
would still benefit from growth in sectors such as real estate, museum and amusement activities,
accommodations, and retail trade of electronics and sporting goods. These are the industries in
which Birmingham meets the least of its estimated need, and therefore, they import extensively
from outside economies. Furthermore, these are also the industries that would be the most
feasible for the economic base to include, because industries such as food services,
entertainment, and accommodations would use private investments from local companies, and
they would also attract more visitors from outside the local economy to bring money to the city.
F) Dependence on Large Establishments
Looking at Birmingham’s dependence on large establishments in the base economy can
assess the health and stability of the economy. If a local economy is dependent on only a few
firms to employ its workers, they are more vulnerable to the decisions of single companies, while
economies with many smaller employers are less dependent because the loss of one employer in
the economy will have a less significant impact. Figure 3 below illustrates the distribution of
establishments in the base economy, by their size. The largest portion of the chart is
Snelling 6
establishments of 50-99, and the smallest is establishments with greater than 1000 employees,
which illustrates that there is not a significant dependence on the largest industries.
Figure 3. Establishments Within Base Economy
G) Viability of Basic Industries
When analyzing the economic base of a locality, it is important to understand the health
of the economy currently, but it is possibly more important to understand the health of the
economy in the future. Projecting shifts in the local economy can help communities diversify and
prepare for changes in its economic circumstances, and to lighten the impact of economic
downturns. The US Bureau of Labor Statistics has established an intricate system of employment
and output projections to determine how industries will be doing in the future.3 In 2005, Jay
Berman of the Bureau of Labor Statistics published the system’s predictions for 2014, which
anticipated that employment gains would come from construction and services, while
employment losses would come from agriculture and manufacturing.4
For Birmingham’s base economy, Berman’s predictions are not devastating, but they do
contribute to an estimated overall loss in employment between 2004 and 2014. The primary
areas of job loss will be, first, the primary metal industries, which reflects the ongoing loss of
iron and steel jobs in the United States, and then broadcasting and telecommunications, which in
Birmingham is made up primarily of wired communications, which are being replaced by
wireless communication. From 2004 to 2014, Birmingham is project to lose a total of 2,629 jobs
in basic industries, and an additional loss of 1,315 jobs in the non-basic industries. Meanwhile,
3
4
Berman, J.M. (2005, November). Industry Output and Employment Projections to 2014.
Ibid.
Snelling 7
Birmingham is projected to gain employment in the areas of construction and insurance. These
projections are good for Birmingham, because these are also some of the largest industries, so
the growth will disperse amongst a greater number of workers. Birmingham’s employment gain
in the base economy is projected to be roughly 1,998 jobs, with an additional 999 jobs lost in
nonbasic economic activities. When totaled, these figures project Birmingham to lose a total of
947 jobs between 2004 and 2014, which is approximately a -0.2% change, which is a loss, but
not one that will significantly impact the health of Birmingham’s economy.
Industry Name
NAICS
Code
525
Average Annual
Rate of Change, %
+0.9
Industry Change 20042014
+59
Petroleum & Coal Products
324
-1.5
-260
Primary Metal Industries
331
-1.7
-1261
Utilities (electric, nuclear, etc.)
221
-0.3
-192
Broadcasting & Telecommunications
513
-0.7
-897
Building, Developing & General
Contracting
233
+1.1
+1320
Pipelines, Except Natural Gas
486
-0.5
-19
Nonmetallic Mineral Products
327
+0.4
+148
Monetary Authorities- Central Bank
521
+0.5
+8
Insurance Carriers & Related Activities
524
+0.3
+463
Funds, Trusts & Financial Vehicles
Total Change of Base Employment:
- 631
Total Change in Employment:
-947
Figure 4. Industry Growth and Decline 2004-2014
Source:
Source:
County Business Patterns 2000
Berman, Industry Out and Employment Projections to 2014, 2005
Snelling 8
H) Local Industry Clusters: How the Economy Fits Together
An important aspect of economic analysis is determining how much the various
industries in the economy interact and what they supply one another. When industries get the
majority of their inputs from within the local economy, the majority of their revenue then stays
within the local economy. To analyze this clustering of industries in Birmingham, this paper will
focus on Insurance Carriers and Related Activities, which is the largest of the industries in the
economic base.
Figure 5 below describes the inputs that the Insurance industry receives from other
industries within the same economy (and Birmingham in particular), which consist primarily of
insurance, finance, real estate, and various professional services. In Birmingham, these industries
employ roughly 22% of the economy’s total employment. This suggests that the insurance
industry is strongly connected to the largest industries in Birmingham’s economy, and therefore,
that these industries are in a cluster. Inter-industry relationships are important to the local
economy, because they solicit growth and new investment, by sharing the costs of services like
transportation and communication.5 In Birmingham, this also implies that there is a stronger
dependence on the Insurance industry than is initially realized, as many of the largest industries
supply the insurance industry. Therefore, this puts Birmingham’s economy at risk, because if the
insurance industry ever left the area, the suppliers listed in Figure 5 would have to decrease
employment.
Supplier Industries for Insurance6
Coefficient
70B: Insurance
70A: Finance
71B: Real Estate
73C: Other Business and Professional Services
73B: Legal, Engineering, Accounting, and Related Activities
1.38420
0.08827
0.07687
0.07590
0.03557
Local
Employment7*
15,435 (524)
15,787 (522)
4,120 (531)
37,884 (561)
22,863 (541)
Location
Quotient8
1.75
1.49
0.84
1.11
0.87
Figure 5
Source:
Source:
5
County Business Patterns
Lawson, Benchmark Input-Output Accounts for the U.S. Economy, 1992
* The number in parenthesis represents the NAICS Industry Code, which was used to determine the local employment.
Dicken, P. (2007). Chapter 1: Questioning 'Globalization'.
Lawson, A. M. (1997, November). Benchmark Input-Output Accounts for the U.S. Economy, 1992.
7
US Census Bureau. (2000). County Business Patterns: Birmingham, Alabama [Data file].
8
ibid.
6
Snelling 9
I) Conclusion
This paper analyzed the current economic conditions in the Birmingham MSA, by
analyzing the diversity, dependence, viability, and interactions of the base industries. The
analyses revealed that the Birmingham economy is quite healthy, and prepared to withstand
changes in the national economic climate. A large number of industries and establishments are
represented in Birmingham, which makes the economy both stable, and independent of large
corporations. However, as seen in the clustering analysis, there is a substantial amount of
industry interactions, which means that the industries in the area give input to one another and
rely on this input for revenue. These interactions are good because they keep money within the
local economy, but it can also be dangerous if an industry that receives a lot of inputs leaves the
local economy.
Overall, the Birmingham economy is strong, and the government should work to keep it
that way, and to prevent any industries, especially those in the economic base, from leaving the
MSA. The economic renovations that Birmingham has undergone since World War II have paid
off for the city. This economic makeover has brought the economy into the age of information
and technology, which in the long run, will keep Birmingham viable, while other postmanufacturing cities will struggle.
Snelling 10
Works Cited:
Berman, J.M. (2005, November). Industry Output and Employment Projections to 2014.
Monthly Labor Review, 128(11), 45-69.
Dicken, P. (2007). Chapter 1: Questioning 'Globalization'. In Global Shift (5th ed., pp. 3-31).
New York: Guilford.
Galambos, E. C., & Schreiber, A. F. (1978). Economic Base: What our jobs are tied to. Making
Sense Out of Dollars: Economic Analysis for Local Government.
Lawson, A. M. (1997, November). Benchmark Input-Output Accounts for the U.S. Economy,
1992: Make, Use, and Supplementary Tables. Survey of Current Business 77, 36-82.
US Census Bureau. (2000). County Business Patterns: Birmingham, Alabama [Data file].
Retrieved from http://www.census.gov/econ/cbp/index.html
Snelling 11
APPENDIX