Category Archives: Economic Development Strategy

Why Chicago is not Detroit

By William Sander and William Testa

Over the past decade, 17 of the 20 largest cities in the United States gained population. Recent academic studies on these trends have attributed them to changes in residential preferences, the location of skilled jobs, and cultural amenities. Both Chicago (third largest) and Detroit (18th) are exceptions to these trends. The population of the city of Chicago declined modestly from 2.9 million in 2000 to 2.7 million in 2010 after increasing during the 1990s. The population of the city of Detroit has declined more drastically over time from a peak of 1.8 million in 1950 to about 700,000 today; the city filed for bankruptcy in 2013. Since 2010, the population of the city of Chicago has increased modestly (1%), while Detroit’s population has continued to decline. Figure 1 shows population trends for Chicago, Detroit, and other Industrial Belt cities, which have traditionally depended heavily on manufacturing for employment. While Chicago remains much larger than the others despite recent sluggish growth, Detroit has seen a dramatic change in its position.

det_chi_fig1

Due to worsening fiscal problems and a rising homicide rate, Chicago’s prospects have recently been equated with Detroit’s, at least by the popular press. LeDuff1 writes in The New York Times “So Detroit files for bankruptcy…Pay close attention because it may be coming to you soon…Chicago.”  An Investor’s Business Daily editorial notes that “Chicago appears to be following Detroit’s lead to financial disaster.”2 An article in the Financial Times suggests that Chicago’s problems are not too different from Detroit’s.3 And so on.

For one, both places have been severely challenged by loss of manufacturing activity. Detroit and Chicago have lost over 100,000 and 300,000 manufacturing jobs, respectively, since the late 1970s; other midwestern cities (Milwaukee, Cleveland) have not been far behind. The inverse relationship between an historic MSA concentration of manufacturing jobs and subsequent growth from 1969 onward is evident for the most prominent Great Lakes metropolitan areas. More broadly, the growth-retarding effect from manufacturing on U.S. metropolitan areas over the 1960–90 period has been documented in a statistical study by Harvard’s Edward Glaeser.4 As evidenced in figure 2, manufacturing employment losses and depopulation within the central city were contemporaneous in both Detroit and Chicago.

det_chi_fig2

Declines in manufacturing jobs are a result of improvements in manufacturing productivity as well as the movement of production elsewhere including both suburban areas and overseas. For example, data for Michigan indicates that vehicle production in 2015 was at about the same level as 1990. However, employment in producing vehicles over this period declined by about one-half.

Suburbanization has taken no less a toll on central city manufacturing employment in both Chicago and Detroit alike. In the Chicago metropolitan area, only 9% of jobs are now in the manufacturing sector, while manufacturing accounts for 13% of jobs in the Detroit area. In the city of Chicago, only 6% of jobs remain in manufacturing and 10% in the city of Detroit. As reported by John McDonald for Detroit circa 1950, 61% of the Detroit area’s manufacturing jobs were to be found in the city, with another 13% in adjacent Dearborn, domicile of Ford Motor Company.5 The entire range of the city-suburb split in manufacturing jobs for both MSAs can be seen in figure 3. The advent of controlled access divided highways pulled manufacturing jobs outward within metropolitan areas to take advantage of lower land prices and lower shipping costs.

det_chi_fig3

Although both Chicago and Detroit lost a large number of jobs in manufacturing, it is also evident from figure 2 that the city of Chicago withstood the manufacturing exodus more robustly than Detroit. Unlike Detroit, its population did not decline apace with manufacturing from 1950 onward. Similarly, it did not experience the same degree of job declines. More recently, for example, over the 2000 to 2010 period, metropolitan Detroit experienced a 21.2% decline in employment, while the Chicago metropolitan area lost 7.7% of its jobs. Indeed, the past decade was disastrous for Detroit relative to Chicago. About one in four workers were unemployed in the motor city by the end of the decade. In Chicago, the unemployment rate peaked at a little more than one in ten workers (see figure 4).

det_chi_fig4

The resident population of the city of Detroit has also come to be characterized by a much higher degree of poverty and minority population. The share of households in poverty approaches four in ten in the city of Detroit, compared with 23% in Chicago. According to the latest decennial Census, the Detroit population overwhelmingly identifies as “black” (83%), up from 29% in 1960. Owing to the city’s economic collapse and to the suburbanization of (mostly white) population, by 1990 Detroit had become one of the most racially divided metropolitan areas in the United States. Social and economic issues arising from racial polarization since early in the twentieth century have been cited as a major constraint on the growth and development of Detroit and its suburbs.

det_chi_tab1

Chicago’s racial/ethnic groups also tend to be highly segregated; however, the overall composition of the city’s population is more balanced. Approximately 32% of Census respondents identify as black (including those reporting Hispanic background); 45% report as non-Hispanic white; and 28% as Hispanic. More than 20% of Chicago residents are foreign born. Despite the impression of a balanced population that such figures suggest, racial isolation in Chicago is very similar to that in Detroit when measured on a block to block basis.

Chicago bright spots

Although Chicago has many of Detroit’s problems and more than twice the number of residents living in poverty, Chicago also has many positive features relative to Detroit.

One of the reasons that one might be more optimistic about Chicago’s future is that, in spite of declines in population growth, the city of Chicago has become increasingly attractive to non-Hispanic white college graduates, while the inner-ring of suburbs of Chicago have become more attractive to African-American and Hispanic college graduates. Further, within the city of Chicago, household locations along Chicago’s lakeshore (particularly on the north side of the city), have become particularly attractive to more affluent, college-educated households. Studies indicate that the attractiveness of the city of Chicago to college graduates is at least partly related to growth in skilled jobs in and around the central business district.

Although there are recent indications to the contrary, Detroit has been less successful in attracting resident college graduates. Only 12% of the population twenty-five and older in the city of Detroit are college graduates. In the city of Chicago, 34% of the adult population has at least a bachelor’s degree. In popular areas of Chicago such as Lincoln Park, the vast majority of adults have at least a bachelor’s degree. Further, about half of the twenty-something college graduates in the Chicago metropolitan area live in the city of Chicago, while only 10% of college graduates in their 20s in the Detroit metropolitan area live in the city of Detroit. For college graduates with a school-age child, the percentage living in the city of Detroit is even lower (5%), versus 15% for Chicago. Of the college graduates working in the city of Detroit, only 22% live there. In the case of Chicago, the corresponding statistic is 61%.

Further, median household income in the city of Detroit is only a little over half of median income in Chicago. The poverty rate in Detroit is almost twice as high as Chicago’s, although the city of Chicago has almost twice as many poor residents. The city of Chicago employs about four times as many people as the city of Detroit. About 30% of the jobs in the Chicago metropolitan area are in the city of Chicago, while the corresponding statistic for Detroit is only 14%.

Why Are Chicago’s Prospects Brighter?

For one, Chicago began the era of de-industrialization with a more diversified economy with which to reinvent itself, especially in business services and financial services. In addition to its manufacturing (and goods transportation) prowess, Chicago has long been a purveyor of business and business-meeting services, retail, and financial services to the surrounding Midwest region and beyond. For example, Chicago’s large exchange-traded derivatives industry evolved from the city’s role as a nineteenth century market and wholesale distributor of grain, lumber, and meat. Its highly concentrated management consulting industry owes its twenty-first century success in part to the need of New York City financial houses to closely appraise the operations of Midwest manufacturing companies in the issuance of corporate debt. And the nexus of passenger railroad lines and (later) passenger air travel in Chicago cultivated one of the nation’s leading industries in business meetings and conventions. Accordingly, the profound exodus of manufacturing that occurred from almost all large U.S. cities did not devastate Chicago’s job base to the same degree as happened in Detroit and some other Midwest cities, although some parts of Chicago were hit hard. Admittedly, the Detroit area also maintains very strong business services industries, largely related to the auto industry, but for the most part these services are in suburban locations. In Chicago, many service businesses remain in the city.

Figures 2 and 3 show trends in population and manufacturing in Chicago and Detroit from 1900 to date. In both cities, one can see the spectacular rise in both manufacturing and population to 1950 followed by an equally spectacular decline. However, while population declines in Chicago have been profound, they diverge markedly from the Detroit experience. Nonetheless, much like Detroit, vast neighborhood areas of the city of Chicago were also impoverished by job and population flight to the suburbs, especially those neighborhoods that depended on the middle-income jobs associated with freight and manufacturing. Wages and jobs outside of the central area of Chicago have declined, even while the central area has prospered. Today, many Chicago neighborhoods find themselves challenged in the same ways as neighborhoods in Detroit and other industrial cities by poverty, violence, sub-standard housing, and a lack of immediate and accessible economic opportunities.

Chicago has arguably developed a stronger reputation as a city in which to do business than Detroit and some other midwestern cities. At the turn of this century, Chicago began positioning itself to be one of the emerging “global cities” that had successfully forged commercial connections to other cities of its kind around the world. Global cities are characterized by the most skilled occupations and activities in business services, finance, education, and technology; well-educated residents; forward-looking business leaders; and globally connected transportation and communications networks, among other attributes.

Owing to their strategic importance and global reach, corporate headquarters operations have become a hallmark of success for global cities. Early last decade, Chicago became the global headquarters of Boeing. Since then, the city has attracted Archer Daniels Midland, GE Healthcare, Oscar Mayer, and ConAgra, among others. Relocation of headquarters from the suburbs of Chicago to the central city has also taken place, including United (Air), Kraft Heinz, and Motorola Mobility.

In Detroit, both the IT software company Compuware and Quicken Loans have relocated operations from the suburbs to the downtown area (in 2003 and 2010, respectively). However, the scale of these moves falls far short of similar activity in Chicago.

Some argue that headquarters operations have downsized over time, representing far fewer direct jobs than in the past when headquarters often included back office, research, advertising, and payroll processing operations. However, the presence of headquarters is coincident with a much vaster nearby network of financial and business services, many of which are supported by colocation with the strategic headquarters of corporations.

The upshot then is that, even though the older industrial neighborhoods of Chicago share many of the same challenges as those of Detroit, Chicago has been better able to withstand the decline of industrial production. Whereas the city of Chicago has about four times as many people as the city of Detroit, Chicago has ten times as many jobs in finance, eight times as many jobs in professional services, six times as many jobs in education, and five times as many jobs in accommodation and food services. Since 1998, the Chicago area has gained almost 60,000 jobs in business services, while Detroit has lost over 35,000 jobs in the sector. During this period, Chicago also gained more than 20,000 jobs in colleges and universities, while Detroit gained none.

It is clear that Detroit needs to diversify its legacy industrial clusters as well as to build on them. This focus on industrial rebirth includes further specialization in the auto industry—especially R&D, as well as logistics and transportation, engineering and design, technology start-ups, and business services and finance. Indeed, diversification to a technology-oriented industrial structure has raised fortunes of old industrial regions elsewhere, with the Boston area being a prominent example.

We would note that a number of Rust Belt cities with about as many jobs as Detroit, including Cleveland, St. Louis, Milwaukee, and Pittsburgh have significantly fewer people living in them. This implies that Detroit’s population may not yet have reached a floor. Unlike Detroit, the city of Chicago remains an attractive place to work and live, especially for young college graduates. This could change over time if Detroit can reinvent itself and make further improvements in the delivery of basic public services, especially basic education and public safety. Chicago faces many of the same challenges in improving public services, and in putting its underlying fiscal affairs on a sounder footing.

William Sander, Professor of Economics, DePaul University, Chicago.

William Testa, President and Director of Regional Programs, Federal Reserve Bank of Chicago

A preliminary version of this paper was presented at Inner City Economic Development Summit in Detroit, September 2015.

  1. LeDuff, Charlie. 2013. “Come see Detroit, America’s future.” The New York Times, July 24.
  2. Investor’s Business Daily. 2013. “Emmanuel’s Chicago is on the path to be the next Detroit.” August 7.
  3. Sender, Henny, Stephen Foley, and Richard, McGregor. 2013. “Descent into despair.” The Financial Times. July 26.
  4. Glaeser, Edward, Jose A. Scheinkman, and Andrei Shleifer. 1995.”Economic Growth in a Cross-Section of Cities,” Journal of Monetary Economics 36 (1): 117-143.
  5. McDonald, John F. 2013. “What Happened To and In Detroit?” unpublished paper.

Preview of the upcoming Summit on Inner City Economic Development in Detroit

In a recent blog, I shared my observations about Pittsburgh’s efforts to revitalize its urban core. Then, I analyzed the extent to which Pittsburgh’s turnaround can serve as a model for Detroit as its city leaders and stakeholders look to revitalize the city’s urban core. While Detroit has begun to replicate the efforts of other cities, such as showcasing the city’s riverfront with the Detroit RiverWalk and collaborating with regional leaders and stakeholders, overall its efforts lag those of other Rust Belt cities. The relatively sluggish pace of Detroit’s efforts to revitalize its urban core are also reflected in the slow development of the city’s business clusters, including new business formation. Meanwhile, other parts of the Rust Belt have advanced the development of their respective business clusters, such as West Michigan’s office and institutional furniture cluster and Pittsburgh’s advanced materials and energy clusters.1

Policy professionals, researchers, and other experts will gather in Detroit for a two-day summit–“Revisiting the Promise and Problems of Inner City Economic Development,”—at the Renaissance Center on September 15th and the Federal Reserve Bank of Chicago—Detroit Branch on September 16th. The summit will look at new research and best practices in the field of urban revitalization. It is sponsored by the W.E. Upjohn Institute for Employment Research, the Initiative for a Competitive Inner City (ICIC), the Federal Reserve Bank of Chicago, Economic Development Quarterly, and Sage Publications. For those interested in attending, there is no registration fee but advance registration is required here.

Day 1 will focus on what’s currently happening in Detroit, with an introduction by the Chicago Fed’s Regional Research staff and a bus tour of Detroit provided by the Chicago Fed’s Community Development & Policy Studies group. The tour will highlight some of Detroit’s successes and challenges in its effort to revitalize its urban core and how the three levers of growth—business environment, clusters, and individual firms—are promoting and complementing the efforts of Eastern Market and Midtown Detroit. Eastern Market’s food cluster is expanding in part because of greater economic growth within the city of Detroit. Part of that growth is originating from the development of an innovation district along Detroit’s major boulevard, Woodward Avenue, which is helping to draw young entrepreneurs to work and live in Midtown Detroit. In addition, the tour will illuminate some of what Detroit must still overcome on the path to renewal. The first day ends with a presentation by Detroit Free Press writer John Gallagher, who will share his thoughts about the city.

The second day of the summit will feature two keynote addresses. ICIC Founder and Chairman Michael Porter will look back on his research of clusters and their competitive advantages in inner cities. Later on, Matthew Cullen, President and CEO, Rock Ventures LLC, will provide insight into how his firm has helped contribute to Detroit’s recent surge in economic development. Other featured speakers include Carol O’Cleireacain, Deputy Mayor for Economic Policy, Planning, and Strategy, City of Detroit. Sessions on the second day will examine new thinking on the competitiveness of inner cities and opportunities for business in the inner city.

Making Value for America: A study by the National Academy of Engineering

Production technology and the nature of work are changing rapidly, giving rise to job declines in the manufacturing sector. In this context, can the U.S. design policies that support manufacturing while providing greater opportunity for U.S. workers? This was the question asked of a study panel at the National Academy of Engineering, which produced “Making Value for America: Embracing the Future of Manufacturing, Technology and Work.”

On May 4, Nick Donofrio, who chaired the study committee, joined a panel of experts at the Federal Reserve Bank of Chicago to present the findings and implications from the report. Donofrio was the Executive Vice President for Technology at IBM and a member of the National Academy. Joining him were panelists Dan Swinney (Manufacturing Renaissance and study committee member), Chad Syverson (University of Chicago Booth School of Business and study commission member), Haven Allen (World Business Chicago) and Craig Freedman (Freedman Seating).

Setting the stage for the program was Bill Testa, Vice President and Director of Regional Programs at the Chicago Fed. Testa focused on the key role of manufacturing in the Midwest economy. Within the Midwest region, the manufacturing job base remains 53% more concentrated than in the U.S. as a whole. However, dramatic declines in manufacturing jobs have led many policymakers to pursue other economic development targets. Since 1969, when manufacturing accounted for roughly 40% of the regional job base, manufacturing employment has fallen to 13.5%. Testa noted that from 2000 through the recession of 2009, manufacturing jobs in the Seventh District states of Illinois, Indiana, Michigan, Wisconsin, and Iowa dropped by 35% or 1.16 million; and only 224,000 or 21% of those jobs have returned during the recovery to date.

Testa commented that some of this trend can be traced to technology and productivity. What took 1,000 workers to make in 1950 can be done by 200 today. Moreover, increasingly workers in manufacturing jobs are upskilling and are required to have the ability to work with advanced technology—and to do so at pay scales set by global competition. Despite the many challenges, Testa argued that the Midwest still holds some advantages for manufacturers, such as a strong supply chain and the infrastructure to move goods efficiently. Recreating the region’s network of rail, road, air hubs, and ports would be difficult elsewhere. Second, manufacturing directly comprises 20% of the region’s overall output, but more importantly is responsible for almost two-thirds of the research and development in the region. Additionally, the region’s universities are well positioned to create innovation in engineering and technical fields that can lead to new products and processes.

Donofrio presented the findings from Making Value for America. Donofrio emphasized that this was not a typical manufacturing study. He suggested that in some ways manufacturing is a 20th century word and that what matters today is not simply making things but adding value through production. Understanding where value is added is critical; and in many cases, value comes from services related to the final product. Specifically, he defined adding value as the process of using ingenuity to convert resources into a service or process that contributes additional value to a person or a society. In particular, the study was interested in how the nature of work is changing. Donofrio quoted former MIT president Charles Vest who said, “Far too much of our nation is waiting for new ways of work to arrive. We hear lots of rhetoric about how the nature of work will change, as it relates to some unknown distant future. The fact is that it is happening now, and we need a broader recognition of this fact and policies and education that reflects it.”

Donofrio noted that U.S. employment in manufacturing will never regain its historical levels, but growth will be facilitated by policy that focuses on adding value and innovation. Recommendations from the study focused on three areas—education, collaboration, and being inclusive. A goal is to develop a robust innovation ecosystem that includes business; federal, state, and local governments; economic development organizations; educational institutions; and research organizations. A partial list of recommendations appears in Table 1; the complete list is available at http://www.nap.edu/catalog/19483/making-value-for-america-embracing-the-future-of-manufacturing-technology.

manufacture_table_mattoon

Chad Syverson kicked off the panel discussion by talking about the university’s role in supporting education at the pre K to 12th grade level. He noted that the University of Chicago has been active in urban education, ranging from the creation of charter schools to the creation of the Urban Education Lab. All of these efforts use rigorous social science evaluation to develop best practices for education.

Additionally, the university works directly to support entrepreneurship through the Polsky Center, which serves as a resource for supporting business formation. Syverson noted that the U.S. has had a 30-year downward trend in new business formation and that the dynamics behind this are not well understood. However, it is though business formation that significant innovation occurs, so the trend is disturbing, he said. Complementary services are provided by the Booth School of Business working with the Chicago Innovation Exchange, the 1871 tech incubator, and directly with businesses to disseminate best practices. Syverson noted that large amounts of value are left on the table when firms fail to keep up with best practices and that significant gains for the U.S. economy can be provided by better educating firms.

Haven Allen described the multitude of programs that can be found in Chicago that create manufacturing networks. These include national efforts such as the Digital Manufacturing and Design Innovation Institute (DMDII) and its related Illinois Manufacturing Labs. A clear goal is to connect local firms to this national network of innovative firms. This requires broad partnerships that include businesses, local community groups, and education. Allen stressed that training is key and that recent apprenticeship programs offered by organizations such as the Jane Addams Resource Center, the University of Illinois-Chicago, and Daley College provide models for supporting work force development. Finally, Allen emphasized that successful partnerships will focus on improvements in people, process, and product.

Craig Freedman offered the perspective of a manufacturer. Freedman suggested that the pace of change means that businesses and their workers need to get smarter at all levels. Business needs to link with education in order to make sure that relevant skills are learned at all grade levels. For example, Freedman cited the Manufacturing Connect program at Austin Polytech as a model that deserves replication. The school is located in the Austin community on the west side of Chicago. The program teaches high school students metal-working skills and provides them with certified credentials upon graduation. Local businesses partner with the school and provide apprenticeships and job shadowing opportunities.

Freedman also praised local training organizations such as the Jane Addams Resource Center, Daley College, and the 1000 Jobs Campaign as helping support critical work force development. Finally, Freedman suggested that more work needs to be done to promote the image of manufacturing as a good career path. Current perceptions of manufacturing are based on outdated notions of the industry that need correcting if young people will be attracted to these jobs.

Concluding the discussion was Dan Swinney. He noted that social inclusion should be a goal of the new emphasis of manufacturing rebirth in cities. He also cited the efforts of the Manufacturing Renaissance and the Manufacturing Connect program in the Austin Community in Chicago. Swinney stressed the importance of bringing these types of programs to areas that have suffered disinvestment. The challenges communities like Austin face are clear in the data. While unemployment in Chicago has fallen to 6.4%, in Austin it hovers near 30%. Similarly, manufacturing job loss in Austin is near 90%. However, to address the challenges faced by communities like Austin, Swinney argued, programs like Manufacturing Connect must be scaled up, since they currently only reach a small subset of students.

Economic Development in Chicago

By Rick Mattoon

This last blog in our series on the largest cities in the Chicago Fed’s District focuses on Chicago. (For a complete profile of all five cities, see Industrial clusters and economic development in the Seventh District’s largest cities.) Chicago holds a different place in the urban hierarchy than the other large cities in the District. More than just a large midwestern city, Chicago has obtained global city status and competes with other global cities in the U.S. (New York, Los Angeles, Washington and San Francisco) and abroad (London, Paris, Tokyo, and Hong Kong to name a few) for investment and reputation. Chicago is the home to world-class museums, cultural institutions and universities, as well as corporate headquarters and one of the busiest airports in the world. Importantly, one of Chicago’s primary advantages is its ability to attract human capital. Recent work by Bill Testa and Bill Sander highlighted the ability of Chicago’s downtown core to attract educated young adults.[1] As this survey of city economic strategies has shown, human capital accumulation is a primary strategy for growth, and Chicago appears to have advantages in attracting and retaining skilled workers.

Chicago’s economy underwent a profound shift in the 1990s. As manufacturing jobs began to decline, the Chicago-area economy shifted toward business and professional services. These sectors provided the city with high-paying jobs and helped lift its economy relative to other manufacturing-dependent Midwest cities. As we can see in the data (table 1), Chicago has a highly diversified economy, which closely mirrors the structure of the U.S. economy. Chicago does have challenges. The fiscal condition of the city (and the state) is precarious, highlighted by large underfunded public pension obligations. Also, the city has struggled to emerge from the Great Recession, as highlighted by slow job growth (figure 1).

Chicago’s Industry Structure

As figure 1 shows, Chicago has eight industries with higher employment and location quotients (LQs than the U.S. average.)[2] They are: manufacturing (LQ 1.04), wholesale trade (1.14), professional and technical services (1.13), management of companies (1.28), administrative and waste services (1.20), educational services (1.44), transportation and warehousing (1.24), and finance and insurance (1.16). This provides a highly diverse mix of high-end professional services (accounting, consulting, and advertising) with retained strength in manufacturing and logistics and warehousing.

Economic Development Strategy in Chicago

In 2012, Chicago unveiled a new economic development strategy that was based on a study conducted by World Business Chicago (WBC), which is the city’s public–private economic development agency. The study was based on a series of reports by subcommittees that focused on the recent strengths and weaknesses of Chicago’s economy. In the end, the report identified ten strategies, which included a focus on specific industry clusters—advanced manufacturing, professional services, and headquarters operations—as well as infrastructure improvements. The strategies are as follows:

• Support advanced manufacturing—high-value-added manufacturing.

• Increase the region’s attractiveness for business services and headquarters.

• Enhance the city’s competitive position as a transportation and logistics hub.

• Make Chicago a premier destination for tourism and entertainment.

• Make the city a leading exporter—support export activities, particularly for small and mid-sized businesses.

• Develop a work force in a demand-driven and targeted manner.

• Support entrepreneurship and innovation in both mature and emerging sectors (with an emphasis on product commercialization).

• Develop next-generation infrastructure and new models of public–private funding.

• Support neighborhood vitality that supports regional growth (small and medium-sized enterprises).

• Develop a good business climate. This includes streamlining regulation and providing businesses with a supportive infrastructure.

To implement the plan, WBC has created a series of task forces to develop specific metrics to measure progress toward each goal. As figure 2 shows, part of the desire to articulate a new development plan for the city came from the sluggish job growth that occurred coming out of the Great Recession. While Chicago had grown faster than the District as a whole leading up to the recession, its performance from 2010 to 2012 was lackluster and is still somewhat sluggish.

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[1]William A. Testa and William Sander, “Household Location and Economic Development in the Chicago Metropolitan Area,” mimeo. (Return to text)

[2]The U.S. Bureau of Labor Statistics (BLS) defines LQs as “ratios that allow an area’s distribution of employment by industry to be compared to a reference or base area’s distribution”. (Return to text)

Economic Development in Detroit

By Rick Mattoon

Detroit is the focus of this blog examining economic development issues in the five largest cities in the Chicago Fed’s District. (For a complete profile of all five cities. see “Industrial clusters and economic development in the Seventh District’s largest cities”). Relative to the other large cities, Detroit faces some special challenges. Home to the domestic auto industry, Detroit grew and flourished until increased foreign auto competition began to erode the dominant position of Detroit-based auto producers. With a challenged industrial base and increasing racial strife culminating in the 1967 riots, Detroit began a long process of population out-migration. The city’s population fell from a high of 1.8 million in 1950[1] to the most recent estimate of just under 700,000.[2] This combination of industrial and population decline severely challenged the fiscal condition of the city. The city’s large geographic footprint (140 square miles) and declining tax base made it increasingly difficult to provide city services, culminating in a 2013 Chapter 9 bankruptcy filing, which is still being resolved. Not surprisingly, the city’s immediate economic development plans aim to stabilize its population, restore government services, and attract new businesses that should find its relatively low property prices attractive.

Detroit’s Industry Structure

Figure 1 shows Detroit’s employment structure and industry concentrations (location quotients or LQs) relative to the U.S. Detroit has five industries with above U.S. average employment shares and location quotients above 1. These industries are manufacturing (LQ of 1.29 or 29% above the U.S. average), professional and technical services (LQ 1.45), management of companies (LQ of 1.34), administrative and waste services (1.15), and health care and social assistance (1.09). This reflects recent efforts by the city to develop business and professional services in the downtown business district, which has led to investments by Quicken Loans and Compuware.

Economic Development Strategy in Detroit

In December 2012, the Detroit Strategic Framework Plan was released.[3] The long-term planning aspect of the report was produced by a mayor-appointed, 12-member steering committee drawn from the business, community, faith-based, government, and philanthropic communities. The Detroit Economic Growth Corporation managed the project. The plan is designed to recognize core assets that the city has and to examine ways to leverage those assets to restore and stabilize the Detroit economy. The plan creates four benchmark goals for the city to achieve by 2030.

• Stabilize the residential population at between 600,000 and 800,000.

• Increase the number of jobs available per city resident from the current level of 27 per 100 people to 50 per 100 people.

• Enhance the regional transportation network to better integrate Detroit and the rest of the MSA and develop land-reuse plans that will repurpose existing vacant tracks for new types of development.

• Establish an ongoing framework for civic involvement.

The plan also has specific economic development elements that are captured by five implementation strategies.

• Emphasize support for four key sectors with highest potential growth—education and medical, industrial, digital/creative, and local entrepreneurship. To support growth in these sectors, the plan calls for aligning private and civic investments. This includes having work force development strategies specific to these four industry clusters.

• Use a place-based strategy for growth. In practice, this would target “employment districts” where resources would be channeled to promote growth. The plan establishes seven of these districts and assumes these geographic areas have the greatest ability to bring job growth to scale. This would be complimented by growth in industrial business improvement districts and developing capacity for green business.

• Encourage local entrepreneurship and minority business participation. The strategy here is to develop local business clusters that serve the Detroit market—for example, using local suppliers to feed existing businesses as well as seeking to diversify the economic base of the city. This strategy assumes the provision of low-cost shared space and improvements in other local services that are currently being underprovided in Detroit.

• Improve skills and support education reform. Much of this focuses on improving existing work force training by linking it more closely to the private sector and aligning training to local industry needs. It also calls for better integrating work force development with transportation, encourages hiring of Detroit natives, and calls for a study designed to improve city-wide graduation rates.

• Review land regulations, transactions, and environmental actions. This is a broad land-reuse program that focuses on land banking for industrial and commercial property as well as improving development outcomes by speeding permitting in employment districts and identifying alternative sources of capital for development.

It is clear that much of Detroit’s plan emphasizes stabilizing the current economic base as a necessary step to attract new investment. The plan also emphasizes the creation of home-grown businesses, which is likely necessary to fill in declines in retail and other services found in many Detroit neighborhoods.

If we look at Detroit’s recent history of employment growth over the recent business cycle (figure 2), we see that for almost the entire 2000s, Detroit had negative year-over-year employment growth and performed significantly below the average for the Seventh District. However, emerging from the Great Recession, Detroit’s employment growth is above the Seventh District average up until late 2013 and early 2014, which happens to coincide with the bankruptcy filing. The rise coming out of the recession likely reflects the rebound in the domestic auto industry, which still exerts a heavy influence on Detroit’s economy.

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[1] http://www.freep.com/interactive/article/20130723/NEWS01/130721003/detroit-city-population (Return to text)

[2] http://www.detroitnews.com/article/20140521/METRO08/305210136 (Return to text)

[3] http://detroitworksproject.com/the-framework/ (Return to text)

Economic Development in Milwaukee, WI

By Rick Mattoon

Milwaukee is the focus of this third blog examining the economic structure and development plans of the five largest cities in the Seventh Federal Reserve District. (For a complete profile of all five cities see, Industrial clusters and economic development in the Seventh District’s largest cities.) Milwaukee grew up as a manufacturing city and was famed for its beer industry. Today manufacturing still plays an important role, but the city has added an array of financial and professional services firms and is targeting niche industries, such as freshwater management and industrial controls, to help drive future growth. Milwaukee also has an important difference from other large cities in the District in the sense that it is geographically close to Chicago. Chicago’s considerable economic shadow presents both advantages and disadvantages for Milwaukee. On the one hand, Chicago provides a huge market for Milwaukee’s products. On the other hand, Chicago’s size and influence pulls regional assets, including skilled workers, away from Milwaukee. However, as we will see from the economic development plan, Milwaukee is focused on industries that are either absent in Chicago or might compliment the greater bi-state regional economy.

Milwaukee’s Industry Structure

Table 1 shows the Milwaukee MSA’s employment and industry concentration levels (also known as location quotients or LQs) relative to the US. Milwaukee has a diverse economic base, with above-average shares of employment and industry concentrations across an array of industries.

Economic Development Strategy in Milwaukee

The Milwaukee 7 Regional Economic Development Partnership released a strategy plan in November 2013.[1] The plan was developed over 18 months and was based on the work of five cross-sector working groups. The plan recognizes that Milwaukee’s economy has been lagging that of the nation for the past decade and is in a state of transition, with growth favoring knowledge-intensive products, services, and processes over traditional manufacturing.

The plan identifies nine specific strategies aimed at improving regional productivity. These strategies are:

• become a leading innovator, producer, and exporter of products and services related to energy, power, and controls

• become a global hub for activity in water technology

• grow the food cluster by leveraging geographic, supply chain, and human capital advantages

• increase export capacity, particularly for small- and medium-sized firms

• align work force development with growth in high-potential clusters

• foster an innovation and entrepreneurship ecosystem

• catalyze economic place-making (e.g., recast the economy from an image of traditional manufacturing to more technology-oriented manufacturing and services)

• modernize regional infrastructure

• enhance inter-jurisdictional cooperation and collaboration

Milwaukee’s strategy appears to be more targeted than most other cities’. The Milwaukee MSA has a diverse economic base, with LQs above 1.05 in five industries. Rather than focusing on broader categories, the plan looks at subsectors within large groups, such as energy and energy controls, water science and management, and food production. The other elements of the policy are designed to create economic conditions (through productivity policies) that would benefit almost any industry. These infrastructure and workforce policies seem designed to create a platform for growth for many types of firms.

Finally, as Figure 1 illustrates, Milwaukee’s job growth generally exceeded the region’s average heading into the Great Recession but underperformed the region during the early years of the recovery. Over the past two years, however, Milwaukee’s job growth has been on par with the region’s average.

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[1]See http://mke7.com/~/media/Documents/M7RegionalPlanExecSummary.ashx. (Return to text)

Economic Development in Indianapolis, Indiana

By Rick Mattoon

This is a second in a series of blogs that highlights findings from an upcoming Economic Perspectives article on economic development efforts and industry trends in the largest metropolitan areas in the Seventh District. (For a complete profile of all five cities see, Industrial clusters and economic development in the Seventh District’s largest cities.) This blog focuses on Indianapolis. Like Des Moines, Indianapolis has the advantage of being the state capitol. This helps stabilize its performance in economic downturns. In addition, Indianapolis has a fairly unique regional governance structure called Uni-gov, which it adopted in 1970. This structure supports more unified economic planning across the metropolitan area. When it comes to industry structure, there is a diverse mix of industries in the area, along with some specialized niche industries, such as amateur athletics and auto racing.

Indianapolis MSA Industry Structure

Table 1 displays the industry structure of Indianapolis (based on employment relative to the U.S. as a whole). In addition, the table provides location quotients (LQs)[1] that demonstrate the relative concentration of that industry in the Indianapolis MSA versus the U.S. as a whole. Any score above 1 indicates that the MSA has a concentration above the U.S. average. For example, construction employment in Indianapolis has an LQ of 1.06, which means that its employment share is 6 percent above the U.S. average.

The BLS figures for 2012 have nondisclosure issues for some large sectors, such as manufacturing and accommodations and food service, which likely make significant contributions to the metropolitan economy. Based on the available sectors, Indianapolis’s metropolitan employment shows above national average concentrations in real estate (LQ = 1.1), finance and insurance (1.07), transportation and warehousing (1.66), administrative and waste services (1.29), and construction (1.06).

Indianapolis MSA Economic Development Strategy

Develop Indy is a business unit of the Indianapolis Chamber of Commerce that partners with a wide array of local agencies to identify the region’s competitive advantages and target industries for growth.[2] The initiative has identified six factors that provide a competitive edge to the region: 1) low cost of doing business, including favorable taxation rates (lowest sales tax rate in the Midwest), real estate prices, and utility rates; 2) superior transportation infrastructure, including five major interstate connections, new airport terminal with significant cargo operations, the second largest Fed Ex hub in the nation, more than 100 trucking companies, five major rail lines, and three maritime ports; 3) available and well-trained work force with skills focused in life sciences, digital technology, advanced manufacturing, logistics, motor sports, and clean technology; 4) global appeal, with large foreign direct investment as evidenced by more than 500 foreign companies in the state; and 5) excellent higher education and cultural institutions, including Indiana University-Purdue University Indianapolis, Butler University, University of Indianapolis, and Ivy Tech Community College, amateur and professional sports teams, museums, zoo, and many public parks.

Finally, as the figure below illustrates, employment growth for Indianapolis has done well relative to the Seventh District as a whole. Both before and after the Great Recession, Indianapolis has shown more robust employment gains than has been the case for the District.

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[1]The U.S. Bureau of Labor Statistics (BLS) defines LQs as “ratios that allow an area’s distribution of employment by industry to be compared to a reference or base area’s distribution”. (Return to text)

[2]See developindy.com. (Return to text)

Economic Development in Des Moines, Iowa

By Rick Mattoon

In a forthcoming article in the bank’s Economic Perspectives, I profile the economic development efforts underway in the five largest cities in the Seventh District—Des Moines, Indianapolis, Milwaukee, Detroit, and Chicago. (For a complete profile of all five cities see, Industrial clusters and economic development in the Seventh District’s largest cities.) Each city faces its own unique set of challenges and has a distinctive economic base that has influenced its growth path. In a series of blogs, I would like to summarize some of the major trends in each metropolitan economy, starting with Iowa’s capital city—Des Moines.

The Des Moines MSA (metropolitan statistical area) economy has developed a strong mix between financial and professional service firms and manufacturing. In addition, the city benefits from being the capitol of the state, leading to a high concentration in state government employment. Large employers in the area include Wells Fargo (banking), Principal Financial (financial services), Mercy Medical and United Point Health (both health care), DuPont Pioneer (agribusiness), John Deere (agricultural machinery), Marsh (insurance), and UPS (shipment and logistics).

Des Moines MSA Industry Structure

To get a sense of which industries are most important to the metropolitan area’s economy, we can look at its employment concentration in industries relative to the U.S. Table 1 shows the employment percentage for each industry for both the U.S. and the Des Moines MSA. For example, Des Moines has only two industries where the share of local employment is above the national share of employment—wholesale trade and management of companies. In addition, the table provides location quotients (LQs)[1] that demonstrate the relative concentration of each industry in the Des Moines MSA compared with the U.S. A reading of 1 indicates that Des Moines has the same industry employment concentration as the U.S. As the table shows, Des Moines has significantly above average employment concentrations in two industries—wholesale trade at 1.27 ( or 27% above the U.S. average) and management of companies at 1.17. Additionally, Des Moines’s industry concentrations are roughly in line with the U.S. averages for such important industries as construction, retail trade, administrative and waste services, and arts and entertainment. The industries that are much less represented in Des Moines are agriculture, mining, and utilities (although clearly agriculture is of key importance to Iowa as a whole). Interestingly, two sectors that the city targets for growth, professional and business services and manufacturing, have relatively low concentrations (0.74 and 0.64, respectively). In the case of professional and business services, an issue with the data is that nondisclosure rules do not permit an LQ to be calculated for the important finance and insurance sector, which is likely to have high levels of professional employment.

Des Moines MSA Economic Development Strategy

The Greater Des Moines Partnership led an effort to develop a five-year plan for Des Moines and the capital region. The plan aims to position Des Moines as a midsized city with a specialized industry base. It focuses on an industry and demographic comparison with other similar regions, including Omaha, Nebraska, Madison, Wisconsin, and Denver, Colorado. The plan identifies key clusters in which the region is most competitive and recommends that the region market itself specifically to these sectors: finance and insurance; information solutions; health and wellness; agribusiness; manufacturing; and logistics.

The other elements of the plan are similar to most of the other cities’ development plans in stressing appropriate human capital development and work force training. In particular, the Des Moines plan emphasizes developing an employment and training pipeline that meets the needs of local businesses. There is also a geographic component to the plan, targeting growth along the I-35 corridor.

If one reviews the strategy relative to the data on industry structure, it becomes clear that the targets for development consist of a mix of large employment centers (finance and insurance) and logistics-related wholesale trade, as well as historically important industries, such as manufacturing and agribusiness. Manufacturing does not currently represent a high employment concentration in Des Moines, so its inclusion may signal a hope to revive the sector. Given recent speculation that manufacturing is seeing favorable conditions for reshoring of jobs and activities (due to factors such as lower energy costs), many midwestern cities are hoping to restore some manufacturing activity. Finally, Des Moines also benefits from a stable fiscal situation. While the city’s credit rating was recently downgraded by Moody’s due to unfunded pension obligations, it still has an Aa2 rating. And the state government’s fiscal condition is relatively solid.

Finally, Des Moines’ recent economic performance has been quite strong relative to much of the Seventh District. The following chart shows the year-over-year growth in payroll employment for Des Moines versus the Seventh District average. With the exception of a brief period coming out of the Great Recession, the MSA’s employment growth rate has been favorable. In particular, Des Moines has opened a significant gap with the District since 2013.

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[1]The U.S. Bureau of Labor Statistics (BLS) defines LQs as “ratios that allow an area’s distribution of employment by industry to be compared to a reference or base area’s distribution”. (Return to text)

Seventh District R&D: Manufacturing the Leader

By Bill Testa

Few would take issue that the U.S. economy is propelled by innovation. To stay ahead of their competitors, virtually all enterprises engage in innovation of one form or another. Such innovations take the form of improvements to products, services, and internal processes of production and delivery. In the case of start-ups or new enterprises, the proportion of activity devoted to innovation can be the dominant activity for years prior to its actual operation and revenue generation. Start-up firms have captured the imagination of cities that are encouraging entrepreneurs in their pursuits.[1] Recently, the State of Illinois has offered funds to expand Chicago’s prominent new business incubator, which is named “1871” in reference to re-building from the great fire of that year. Similarly, the City of Detroit will seek to designate and boost its “TechTown” as a major part of its economic redevelopment.

Many established businesses also engage in innovation, but they do so in a more formal way, that is by budgeting for and performing research and development (R&D). The National Science Foundation tracks R&D funds across all sectors, including the U.S. business sector. Their preliminary estimates for 2012 report that the business sector overall performed 70 percent of the nation’s R&D, amounting to $316.7 billion, followed by federal government (12.2 percent), and universities and colleges (13.9 percent).[2]

In tracking R&D performance as measured in dollars that can be allocated across states, the table below ranks Seventh District states by the dollar amount of R&D for each of four major categories for the latest year available, 2011.[3] The business sector dwarfs others in 2011, accounting for almost 70 percent of R&D performed. By this measure, each District state is ranked above the national average, with Michigan’s sixth place and Illinois’ eighth place figuring very prominently. Based largely on the strength of their performance in the business sector, these states also rank highly in overall R&D performed, at seventh for Michigan and eighth for Illinois. Significant contributions to their rankings are also evident from universities and colleges and federally funded R&D Centers (Illinois), and in the case of Michigan, universities and federal government operations.

Within the business sector, manufacturing companies continue to conduct the lion’s share of R&D. As shown below, manufacturing performed 68.5 percent of private sector R&D in 2011. This is down from previous decades, as several service sectors have grown rapidly. In particular, the software publication, computer systems design, and scientific services sectors now comprise, in aggregate, 19.2 percent of R&D performed.

But rather than these service sectors, manufacturing remains the primary contributor to the Seventh District’s R&D prominence. The far right columns in the table below display the District’s relative employment concentration in leading R&D sectors by individual industry.[4] The first three rows present the employment concentration of leading service industries in R&D performance. With a few exceptions, such as Wisconsin’s high concentration in software publishing at 39 percent above the national average, District state concentrations tend to fall below national levels. In contrast, the manufacturing leaders in R&D activity are much more concentrated in District states. For example, concentrations in non-medicinal chemicals such as industrial chemicals exceed national levels in every District state, as does the machinery industry concentration. Pharmaceuticals and medicinals are strong in Indiana and Illinois, while electronic equipment employment is especially concentrated in Illnois and Wisconsin. Meanwhile, employment concentrations in the motor vehicle industries are off the charts in Indiana and Michigan. And as previously discussed, automotive employment and spending for R&D have become much more concentrated there than the total employment numbers might suggest, as the state has held onto its R&D even as production activities have moved to other states and regions.

Among major R&D performers in manufacturing, the only area in which the Seventh District does not have a significant employment concentration is the computer and electronic products sector. This sector’s products and components are distinguished by “the design and use of integrated circuits and the application of highly specialized miniaturization technologies (which) are common elements….”[5] Manufacturing activity and employment in this sector have tended to concentrate in California, Texas, Massachusetts, and other states outside of the Midwest region.

As regions look to innovation as the wellspring of their economic development, they may be well advised to build on their existing sources of innovation activity. For the states of the Seventh District, the traditional base of manufacturing industries is clearly an important candidate.

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[1]See http://www.brookings.edu/about/programs/metro/innovation-districts.(Return to text)

[2]Funding patterns differ from R&D performer patterns; the federal government funds almost 30% of overall R&D, with large proportions allocated to the business sector (especially defense contractors) and colleges and universities. The character of R&D also differs across sectors, with colleges and universities typically engaging in “basic” research, an activity that advances science with no specific application. In contrast, businesses more often fund development and applied R&D, activities that are intended to introduce new products or services into commercial use. See InfoBrief, NSF 140307, December 2013.(Return to text)

[3]For individual state profiles with many measures, see http://www.nsf.gov/statistics/states/interactive/show.cfm?stateID=53,14&year=0.(Return to text)

[4]Employment concentrations are measured here across all occupations of firms in the sector, not solely R&D activities.(Return to text)

[5] http://www.bls.gov/iag/tgs/iag334.htm (Return to text)

Note: Thanks to Timothy J. Larach for assistance.

OECD Chicago Economy Conference

By Emily Engel and Susan Longworth

On Friday September 27, 2013, The Federal Reserve Bank of Chicago hosted the Summit on Regional Competiveness (Summit) with The Alliance for Regional Development (Alliance) and the Chicagoland Chamber of Commerce. The Alliance is an economic development group working to implement recommendations contained in a 21-county, tri-state (Illinois, Indiana, and Wisconsin) analysis completed by the Organization for Economic Co-operation and Development (OECD).

According to the OEDC report, cooperative and regionally oriented economic development offers opportunity for sustainable growth in key industries within the Chicago MSA. Please read our blog from last year to learn more about how ‘Federal Agencies Align to Support Regional Growth’.

The goal of the Summit was to demonstrate that the tri-state region can cooperate to find solutions to the challenges in the OECD report.The agenda included welcome remarks from Daniel Sullivan, Director of Research and Executive Vice President, Federal Reserve Bank of Chicago, and a keynote address from Austan Goolsbee, the Robert P. Gwinn Professor of Economics, University of Chicago’s Booth School of Business (link to http://www.ustream.tv/search?q=ChicagoFed). The emcee for the event was Theresa E. Mintle, President and Chief Executive Officer, Chicagoland Chamber of Commerce. Governors Scott Walker of Wisconsin; Governor Pat Quinn of Illinois; and Governor Mike Pence of Indiana all attended the Summit. Video from the summit is available here.

The Summit addressed the following topics:

• Matching Skills to Jobs in the Tri-State Region—to explore potential regional approaches and programs that satisfy business needs while closing the skills gap;

• Innovation in the Tri-State Region—to explore how best to enhance the region’s performance in innovation-driven business clusters;

• Transportation and Logistics in the Tri-State Region—to explore how connectivity including, air, road, port, and rail transportation can help grow the region’s future as a mega-logistics hub; and

• Increasing the Region’s Competitiveness through Green Growth—to explore environmental factors impacting economic growth and development.

Takeaways from the Summit included the following points.Panelists highlighted the need to brand the region in a manner that capitalized on regional assets like the Great Lakes and a central location. Concerns were raised about balancing municipal needs with regional ambitions. As municipalities struggle to retain and raise revenue and jobs, there is unresolved tension between collaboration and competition that is most acutely felt by local officials.The region’s significant transportation assets were mentioned frequently, along with the need to address growing congestion and manage natural resources, such as the Great Lakes and other inland waterways responsibly. Workforce development was discussed at length and strategies for engaging and training new workers were emphasized. Panelists recognized the increasingly technical nature of today’s jobs and the challenges faced by those seeking higher education.

For the full agenda, please see the Federal Reserve Bank of Chicago’s website.

For more background information, please read the Chicago Tri-State Metropolitan Area OECD report.