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Understanding Location Quotient

Overview
Location quotient (LQ) is a way of discovering the industries or occupations that are truly unique and specialized in your regional economy (compared to the national average). 

For example, if the commercial bakeries industry in your city accounts for 2.5% of jobs but only 1% of jobs nationally, then the city’s commercial bakeries have an LQ of 2.5, which means that this industry is 2.5x more concentrated in the region than the typical region. 

LQ for Industries and Occupations
The basic uses of location quotient include: 

  • Determining local or regional specialization. Here LQ is remarkably effective at quickly identifying those industries or occupations that stand out because of their higher than average per capita employment. This is what makes your economy unique.
  • Identifying the region’s export industries. Industries with a high LQ are often those that are exporting a lot of goods and services out of the community and are therefore net-importers of valuable dollars.
  • Identifying endangered export industries that could erode the region’s economic base. 
  • Identifying industries and occupations that are below equilibrium in the economy and that might be fighting to gain balance. 

How LQ Is Calculated?
LQ is calculated by comparing an industry’s or an occupation’s share of regional employment with its share of national employment. Suppose actors and comedians account for 8% of all regional jobs in Vancouver, and 3% of all national jobs. Vancouver’s LQ for actors and comedians would be (0.08 / 0.03) = 2.7, meaning those jobs are 2.7x more concentrated in the region than the rest of the nation on average. 

Or say registered nurses in a region account for 10% of all jobs, while in the nation they account for 9% of all jobs. The LQ of nurses in the region is thus (.1 / .09) = 1.11. This means that the region’s concentration of nurses is just slightly higher than the national average.  

What Does LQ Mean?
Industries with a high LQ are typically (but not always) export industries, which are important because they bring money into the region, rather than circulating local dollars around the economy (which is more typical for retail or restaurants). 

Occupations with a high LQ are important because they are generally employed by high-LQ industries and thus provide a workforce-oriented perspective of the region’s economic base. Such occupations are vital for the continued prosperity of the region. 

When considering an industry’s LQ, you need to also take into account the number of jobs and percent change. A high LQ signals high concentration, but the concentration’s impact on the regional economy depends on the number of jobs actually present in the economy. A positive or negative change in an industry’s LQ will be much more indicative of the economy’s health if the industry also employs a lot of people. 

Examples:

    1. For instance, in Saskatoon, Saskatchewan, mining has an LQ of 14.41 — which means that mining is fourteen times more concentrated there than the typical region — and employs over 3,000 workers. As a result, we know that mining is a vital component to the Saskatoon economy. Other industries, such as petroleum wholesalers (LQ, 6.30) and cannabis manufacturing (LQ, 4.70) also have high LQs, but because they employ less than 1,000 people, a decline in employment in these two would not shake Saskatoon’s overall economy as much as employment loss in mining. Again, the point here is to have a tool to judge the importance, impact, and significance of industries so you can use data to drive focus (of limited time and resources) to what matters most. 

      Emsi Industry Table

       

    2.  Montreal is a significant area for the aerospace product and parts manufacturing industry (LQ 4.3). Since this industry employs over 26K people, a drop in employment would negatively affect the entire Montreal area in terms of wages. By using our Input-Output model, we were able to project the impact that a decline in employment in the aerospace manufacturing industry would have on the Montreal region: Subtracting 500 jobs from the industry means losing $75.2M in wages and an additional 1.3K jobs across the entire region.

      Emsi Input-Output Model

    3. This applies to specific occupations as well. For example, there are 6.7K petroleum engineers in the Calgary metro area, which means that these jobs are over 13x more concentrated in Calgary than in the typical region. Because these jobs also earn an average of $58/hour, a decline in employment would have a large ripple effect on the entire Calgary economy. 

      Emsi Occupation Table

 

    Applying LQ
    In general, LQ is best used to find those economic gems that are super concentrated and specialized in your economy. Sometimes they’re obvious–like forest nurseries in Prince George and computer and electronic product manufacturing in Granby. LQ helps establish the importance of these well-known industries so you can focus on nurturing their drive in your economy. In other cases, LQ helps reveal industries or occupations that you might not be as aware of, like fruit and vegetable preserving in Lethbridge or fibre, yarn, and thread mills in Sherbrooke. 

      Location quotient is useful for institutions looking to improve their curriculum. This is because an awareness of the region’s high-LQ industries and occupations can help colleges and universities focus on developing programs that align to high impact industries and the occupations that they need. Supporting higher impact industries and occupations is good for the region, good for the businesses, good for the students, and good for the overall economy. Programs that cater to the economy will help produce graduates who are more qualified for the workforce, which in turn creates more successful businesses and a healthier economy overall. 

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      Let us know what specific questions we can help you with (we may even add your question to our knowledge base).