April 6, 2012
Hog Butcher No More, but Service Purveyor to Same?
By Bill Testa
For Chicago (and the U.S.), no one would argue that economic conditions have approached a state of full recovery. Almost three years into the expansionary phase of recovery from the 2008–09 recession, Chicago’s unemployment rate remains lodged near 9 percent. Yet, these three years of expansion may be telling in other ways. That is, comparing Chicago’s current experience with its past recovery experiences can provide insights into the structure and outlook for Chicago’s economy.
As seen in the chart, the Chicago area’s unemployment rate is typically slower to recover from recessions than the U.S. overall. This is somewhat to be expected, since Chicago and Midwest recessions are typically sharp and deep owing to the region’s preponderance of manufacturing companies. Following steep recessionary declines, it takes a while for these and other companies to re-engage the work force.
A further glance at the chart reveals that the Chicago area’s economy was especially tardy in its labor market recovery following the short and shallow recession that ended in the fourth quarter of 2001. The Chicago area’s unemployment rate did not converge with the national rate until very late in 2006. Today, by contrast, ten or more quarters past the end of the national recession, the Chicago area’s unemployment rate seems to be making substantial progress toward convergence with the rest of the U.S.
One of the underlying reasons for this difference in experience is probably the different behavior of the manufacturing sector in these two periods. In the current period, manufacturing has been growing since the end of the recession both in the nation and the Midwest. In contrast, the period surrounding the 2001 recession saw manufacturing declining markedly. From 2000- 2003, the Great Lakes states surrounding Chicago lost almost 700,000 manufacturing jobs on net—representing about one-fourth of all U.S. manufacturing jobs lost in that period.
To be sure, the Chicago economy does not have the deep manufacturing orientation that it once had—at least not directly. Once “hog butcher to the world,” Chicago is now more of a provider of high end business and financial services. Today, Chicago is the capitol of the risk product financial exchanges and a center of vibrant job opportunities in accounting, law, management consulting, business meeting/travel, and corporate headquarters operations. Nonetheless, looks can be deceiving, in that these service operations are often vitally linked to goods-producing service customers. That is, the Chicago economy continues to sell its business services to Midwest and national goods producers, both in agriculture and especially in manufacturing. Accordingly, regional and national trends in goods production continue to matter to Chicago’s economic performance and well-being.
The table lays out the Chicago area’s job performance during the ten quarters following each of the past two recessions. To begin with, as measured by total private sector job growth, we see that Chicago’s overall performance following the 2001 recession was abysmal. During the national recovery, the Chicago metropolitan area (CMA) experienced a jobs decline of –2.6 percent or over 100,000 jobs. In contrast, so far in the current recovery, private sector payroll jobs in the CMA have expanded by 1.2 percent.
Which particular industry sector differences explain this overall performance? In the recent period, the CMA shares some important trends with the national economy. In the aftermath of the housing market collapse, for example, job growth in the construction sector is much weaker. State and local governments also continue to downsize today, unlike the post-2001 expansionary period. So too, financial activities such as banking and real estate continue to shrink during this expansion. The latter presents a challenge for Chicago, as its economy is more concentrated in financial activities than the nation (column 6).
But perhaps the most concentrated industry for Chicago is “professional and business services.” In this sector, and unlike the earlier experience, the region has achieved net job growth of 7 percent this time around, versus a loss of 2 percent at this point in the post-2001 expansion.
A look at the past behavior of this industry reveals that, during the last expansion, CMA employment in business and professional services did not bottom out until almost 2004 (Figure 3 below). Nationally, the sector also performed poorly. However, the national business services sector outperformed Chicago's business service sector, hitting bottom nationally several quarters ahead of the CMA trough.
To understand Chicago’s business services performance, we must look to trends in manufacturing. Chicago remains a major wholesaler, transporter, and warehouser of goods that are produced in the broader Midwest region. It is here in Chicago that all six major North American railroads come together and the largest North American intermodal freight operations (i.e., between truck and rail car) take place. As shown in the table, employment in the CMA’s “transportation and warehousing (and utility)” sector has expanded by 5 percent over the past ten quarters, versus a decline of 5 percent during the post-2001 expansion.
It is likely that Chicago’s vaunted business and professional services sectors are also being led by demand from the surrounding goods-producing customers. The final chart shows a strong correlation (0.88 out of 1.0) between Chicago’s business/professional service job growth and manufacturing job growth in the Great Lakes states that look to Chicago as a regional business hub. The correlation in job growth between Chicago’s own professional services and manufacturing sectors is similarly high, at 0.86).
Midwestern policy leaders need to understand these correlations in order to influence the CMA’s job prospects and economic conditions. Certainly, the CMA economy has an important footprint as a global city that is tied to services and travel around the world. But its economic base remains strongly tied to goods production in the nation and the nation’s mid-section.
July 11, 2011
Chicago's Center Leads the Way?
As central cities go in the Midwest, the city of Chicago is often held up as exceptionally successful, having experienced something of an economic renaissance since 1990. Much like other Midwest central cities, Chicago suffered acutely from population and manufacturing decline accompanied by sharp suburbanization during the 1970s and 1980s. The city’s population declined 10.7 percent during the 1970s and another 7.4 percent during the 1980s, which amounted to a population loss of 583,000 over the two decades. But a population turnaround unfolded in the 1990s when Chicago enjoyed a population gain of 4.0 percent—the first such gain since the 1950s. The trend proved to be short-lived, however, as the recent decade 2000-10 took back 6.9 percent of Chicago’s population.
Despite such mixed success, Chicago does stand out somewhat among large metropolitan areas in the Midwest region, boasting several elements of marked improvement since 1990. For one, the city has attracted a population of educated, mostly young, working adults. Owing to in-migration, the city’s 25-34 year old population now has a higher four-year college attainment rate than the suburbs. Residential neighborhoods in the city (and the downtown itself) have especially shifted toward young and college educated households, who have invested heavily in housing and housing rehab. In the process, Chicago’s manufacturing orientation has transformed to service jobs in the business services, finance, education, and health care sectors.
One indication of Chicago’s strengthening core can be seen by comparing the central city’s unemployment rate with that of its surrounding suburban area. Typically, owing to the tendencies of the urban poor to reside in some central city neighborhoods, average central city unemployment tends to exceed suburban averages in large U.S. metropolitan areas. As seen below, this also holds true for the Chicago area.
However, the unemployment rate of the city of Chicago has been converging with that of the greater metropolitan area since 1990 (below). In the early 1990s, the city’s unemployment rate exceeded the metropolitan area’s by over 2 percentage points. By the end of last decade, the gap had narrowed below a single percentage point.
Unemployment rates are measured for survey respondents according to where they live, not where they work. Accordingly, given the gains in educational attainment among those who live in the city, it is not so surprising to also find improvements in unemployment rates.
But what about the city of Chicago as a place to work? Has Chicago’s central city been providing increased employment opportunities? Data on payroll employment and wage income are available by zip code area, though the coverage excludes government workers and several smaller industry categories.
The chart below indexes payroll employment in the entire city from 1994 to 2008 (red line). While job counts have been flat within the city boundaries, income generated by available jobs indicates steep earnings gains, possibly reflecting a more highly skilled or at least more highly compensated job composition. Price-adjusted average payroll earnings per employed worker have climbed very steeply since 1994--by over 50 percent by 2008! (blue line).
On further inspection, as it turns out, gains in both payroll employment and in payroll earnings have been confined to Chicago’s central area while, on average, both jobs and payroll have declined over the same period in the outlying city area. The charts below contrast the central area with the outlying city neighborhoods; the map that follows provides employment detail by zip code area within the city of Chicago. Aside from strength at the core, job growth is evident on the Northwest side as one nears O’Hare Airport.
In examining the four large central cities of the Seventh District, the central areas of the other three—Detroit, Milwaukee, and Indianapolis--have also generally outperformed their outlying city neighborhoods as both job and income-generating domiciles. However, in the case of central city Detroit, outperformance has still meant a 9.5 percent job decline over the period. The Milwaukee and Indianapolis central areas have performed better in this regard, though they have underperformed Chicago.
Central areas of large Midwest metropolitan areas continue to hold promise in contributing to the redevelopment of their broader city and metropolitan area economies. Led by Chicago, the central areas have been generating significantly more earnings from a moderately growing payroll job base.
Note: Thanks to Wenfei Du and Norman Wang for assistance.
February 1, 2010
Groundhog Day for Chicago's Economy?
Has the Chicago area lost its mojo? Given the poor economic conditions pervading so many regions of the United States, Chicagoans are not alone in asking whether their path of growth and development has gone off track. When the nation’s economy as a whole is down, it is especially difficult for individual regions to interpret economic signals concerning their long-term performance, but the tendency is to read them negatively. For Chicagoans, recent anecdotal evidence may also have shaded their views about the future of the wider Chicagoland area. For instance, Chicago lost its confident bid for the Olympic games this past fall in the first round; Oprah Winfrey announced the relocation of her iconic show to another locale—and, incidentally, from broadcast syndication to her own cable network; several large trade shows announced new venues or possible moves away from Chicago; and the planned mixed-use residential tower—The Spire—halted construction. Such events hardly settle the case; many positive developments mark Chicago’s past decade. In particular, Chicago’s two prominent financial exchanges—the Chicago Mercantile Exchange and the Chicago Board of Trade—moved successfully into the era of electronic trading; and they then merged into the world’s largest (CME Group), expanding even further by recently acquiring the New York Mercantile Exchange (NYMEX). The city’s Millennium Park opened to worldwide acclaim; Trump Tower was completed; and the famed Art Institute opened its Modern Wing—the largest expansion in the museum's history. Additionally, Chicago’s design and architectural talent played an integral part in the completion of the world’s tallest building in Dubai.
Even with such accomplishments, Chicagoans have a more fundamental reason to pause when assessing their economic direction and performance. Following some very painful years of restructuring that took place during the 1970s and 1980s, the Chicago area economy and its central city experienced a surprising revival from the late 1980s through the 1990s. The revival led many local leaders to believe that the region had begun a new improved course of growth and development. The charts below first show the metropolitan area’s unemployment rates since 1980. Following the 1981–82 national recession, when the local unemployment rate had soared to above 11 percent , the unemployment rate began to fall steeply; it rose again during the 1990–91 recession, but it then continued to fall to just above 4 percent by the year 2000. By comparing the Chicago area’s unemployment rate with the nation, we can see that Chicago’s labor market tightness exceeded the nation’s during the mid to late 1990s, before rising above the nation’s once again over the recent decade to date. Was Chicago’s strong economic performance during the 1990s an aberration?
Chicago’s turnaround following the 1980s was remarkable in that a fundamental restructuring supported it. Specifically, though the metropolitan area shed much of its manufacturing base, its work force shifted increasingly into professional and business services. In response, many Chicagoans crafted a new image of their metropolitan region: Instead of being a “hog butcher for the world” and the regional locus for manufacturing and transportation, Chicago (at least in the mind of its citizens) was moving into a new role as a global city, one whose economic connections were being forged with other world business capitals. Chicago was seen as a city casting off its roots for something better.
During this time, a central city revival contributed greatly to the wider metro economy. For example, Chicago became a magnet for young educated workers who occupied jobs in the rapidly growing business and professional services sectors. The central city’s quality of life and amenities reputedly brought in “knowledge workers,” in turn attracting companies or those parts of companies that desired access to the young, highly skilled labor pool. The number of central area jobs in professional and business and financial services grew robustly; and the city’s unemployment rate improved, gaining ground on that of its suburbs from the early 1990s onward. The central city gained population during the 1990s for the first time (counting the decade’s total) since the 1940s, although immigration of lower-skilled workers from Central America accounted for a majority of the gains.
Chicago’s performance in the current decade looks much less sanguine. As seen in the charts above, the metro area’s unemployment rate rose rapidly during both recessions of the 2000-09 decade, lingering above the national average for much of the first several years. Shortly after the 2001 recession, a gap of one-half percentage points or more opened up to Chicago’s disadvantage, and it did not dissipate until 2006. And over the past year or more, the Chicago unemployment rate has once again been running 0.5 percentage points or more above the nation’s.
Were some especially negative but transitory factors at play earlier in the 2000s' decade that would suggest that the outlook for the coming years should be revised upward? Yes, to some degree. Chicago’s sizable manufacturing sector declined disproportionately compared with that of the nation in the early part of the recent decade. In part, the Chicago area’s manufacturing base was steeped in telecommunications equipment, which was especially hard hit nationally. Although the current national downturn in manufacturing is also very steep, Chicago’s manufacturing job base is weathering the recession modestly better than the nation’s.
The post-9/11 fallout in travel and tourism also left Chicago vulnerable earlier in the decade. And while the current economic environment has also been very challenging for the travel-related segments, these segments have fared better than earlier in the decade.
Chicago’s lagging post-recessionary recovery earlier in the decade can also be traced to its hefty professional and business services sectors. After 2001, Chicago’s payroll job growth in these sectors lagged the end of the U.S. recession by two full years. Many of these industries behave like investment or capital goods (e.g., real objects owned by individuals, organizations, or governments to be used in expanding production and sales of other goods or services). That is, during post-recessionary periods companies do not begin to expand their purchases of capital goods until their existing capacity begins to strain and the prospects for market expansion become buoyant. Looking forward, this means that these important business sectors for Chicago may once again experience a sustained period of growth. But the current economic signal is unclear as to whether the Chicago area economy is in a lull, or whether its long-term growth prospects have dampened.
Hindsight does give us some perspective as to the degree to which the Chicago metro area economy has truly divorced itself from its regional business roots to connect with a newly emerging structure in global markets. One chart below shows a ratio of broad economic activity—namely, per capita income—for the Chicago region to that of all other metropolitan areas over the past four decades; the other chart shows the ratio of per capita income of the Chicago area to that of the industrial Midwest states of Illinois, Indiana, Wisconsin, Michigan, and Indiana. First, in comparing Chicago’s per capita income to that of all other U.S. metropolitan regions, Chicago’s relative income is seen to fall modestly in the 1970s and then steeply over the first half of the 1980s. But then, from the mid-1980s throughout the 1990s, per capita income gained steadily on the U.S. average; by this metric, Chicagoans were correct about their economy’s performance: It had truly been on the rise over that period.
However, it is more difficult to draw the conclusion that the Chicago area had successfully restructured its jobs base away from its surrounding region to become a global city. Whether Chicago had become more of an interconnected global financial and business center, such as New York or London, is still an open question. As seen above, for much of the 1990s, the Chicago region’s per capita income made little if any gains on the Great Lakes region. Rather, by way of explanation, the surrounding Midwest region was also experiencing a comeback of the same degree . Domestic automakers were well on their way to profitability in producing energy-hungry passenger vans and sport utility vehicles. Meanwhile, rapid growth in the developing world supported Midwest production of capital goods machinery, such as farm and construction equipment. The Chicago regional economy continued to restructure toward high-skilled service provision, but its linkages may have remained somewhat parochial. That is, the Chicago area’s own growth appears to have been achieved through the provision of professional and transportation services to its traditional Midwest business partners.
In reappraising the era of the 1990s (especially in light of the Chicago region’s recent subpar economic performance), Chicago leaders and analysts may be motivated to look more carefully at possible directions for the future. Relative to some other Midwest and Northeast cities, the Chicago area has many assets, such as its prodigious base of professional services and a vibrant central city, which may provide ample opportunities for growth. Yet the future of Chicago’s economic direction and structure remain somewhat murky.
In the current decade, Chicago’s gain on the surrounding region largely reflects rapidly falling incomes and economic activity in Michigan. (Return to text)
October 22, 2009
Chicago: Tall and Striving
The autumn season brings full tilt to Chicago’s convention and tourism activity. Out on the sidewalks of downtown Chicago, office workers such as me find themselves dodging out-of-towners who are gazing upward at the tall buildings. This year, sidewalk hazards of this sort are especially abundant. The professional building gazers of the world, otherwise known as the Council on Tall Buildings and Urban Habitat, are meeting here in Chicago to contemplate the purposes, construction, and financing of tall building projects throughout the world. They have asked me to address their conference in October on the role of tall buildings in Chicago’s economy.
Economists have long analyzed the purposes and benefits of high density living and working. And since high density cannot be achieved without tall buildings, many of the reasons to why we build so high can be found by considering density’s relationship to urban productivity.
Looking back over human history, transportation of goods and people has presented a costly impediment to beneficial manufacture, trade and travel. For this reason, the land area surrounding natural “nodes” of easy transportation such as water ports and harbors, and later railroad hubs, became very prized. That is to say, the transportation costs of accessing transportation nodes could be economized by intensively using surrounding land. And so, land rents rose there; and buildings for warehousing, factories, trade, and finance mounted as far skyward as the building technologies would allow.
Chicago’s economic history reflects these forces in some very special ways. As documented in two books about Chicago’s economy in the nineteenth century, Nature's Metropolis and City of the Century, wealth creation in the small area surrounding the mouth of the Chicago River literally exploded. Here, a unique node of transportation was developed at the nexus of two vast waterway systems, the Great Lakes-Erie Canal to the east and the Mississippi River Basin to the west. Later in the century, some timely investments in railroad added another important transportation hub to Chicago.
On Chicago’s land, markets were made in grain, livestock, and lumber. Materials were further processed, warehoused, manufactured, and shipped to markets, both domestic and abroad. Marketing and financing were arranged. Specialized retailers evolved to serve western farmers and ranchers, as did machinery makers.
A special Chicago role in building technology was spurred by its rapid economic growth and the intensity of activity on the land surrounding its ports and railroads. In response to the urgency and high cost of downtown land, many innovations in constructing tall buildings emerged here. The innovation of first iron, and later steel, frames and skeletons supporting skyscrapers allowed developers to build higher and stronger, as did the technologies of “floating foundations” that allowed construction of skyscrapers on Chicago’s soft and shifting soils.
Today, the importance of materials movement and manufacturing to Chicago have eroded somewhat . Still, the tall buildings and the attendant high density of work, play, and residence remain and, in fact, they have multiplied to serve other economic sectors. For the most part, the high density and proximity that tall buildings facilitate serve to allow people to communicate in highly efficient and often creative ways. While advances in electronic and digital communication such as the internet and cell phone are very helpful to business communication, they are incomplete. The modern economy has become more “information intensive,” not only in the communication of bulk, digitized information, but also in the face-to-face transmission of ambiguous information. In business meetings large and small, in organized forums and in random networking and social activities, information is created, debated, and transmitted. Workers hatch ideas, learn new concepts, cut business deals, and organize initiatives through such interactions. The “office meeting” has not died. And arguably, the chance encounters from which new ideas often arise have become more important than ever.
The “globalization” of trade and commerce which has taken place in recent decades has also raised the value of inter-personal communication. Globalization has increased the complexity of business transactions as well as increasing the variety of human cultures in which trust and understanding must be established in order for business to flourish.
Certain large and diverse cities, often called global cities, help to meet the requirements of global service exchange and deal making. Chicago definitely fits the bill. Its dense urban core and other features have vaulted Chicago to prominence as a global business center . The metropolitan area now hosts 29 Fortune 500 headquarters offices, and ten Fortune global headquarters. Chicago’s presence in professional and business service is both sizable and closely aligned with business headquarters. Prominent companies in advertising, financial exchanges, research and development, human resources, management consulting, accounting, law and logistics serve businesses in Chicago and around the world. Chicago ranks among the top three U.S. metropolitan areas in the hosting and staging of business meetings and conventions. Top-flight universities add to the mix, including two of the world’s top five graduate business programs at Northwestern University and the University of Chicago. There are over 1,500 foreign-owned firms in Chicago and 30 international chambers of commerce.
Economists usually refer to the added productivity that comes along with high density, large scale population, and a broad scope of (inter-connected) activities as “economies of agglomeration.” What this really means is that the whole of related activities amount to more than the sum of the parts; in Chicago, the co-location of the activities above add up to heightened economic productivity and wealth creation.
What are the interactions and transactions of co-location that give rise to heightened productivity? Some examples would be Chicago's headquarters gathering superior and cost-effective services from local professional service firms; professional firms finding customers at the city’s many international trade shows; recruitment by local firms of graduates from Chicago's outstanding universities; and ample continuing education opportunities for workers at all levels.
In addition, in contributing to agglomeration economies and a successful global city, businesses in the Chicago area also benefit from the city’s important and unique infrastructure, including an international airport. As more companies establish a global presence, they need more frequent face-to-face interactions with their counterparts and customers around the world. Chicago’s O’Hare and Midway airports offer nonstop or direct flights to 148 North American destinations and serve an additional 68 foreign destinations. This scale and reach of travel options are sustainable because of the extensive use of the facilities by (otherwise unrelated) local industries and, thanks to Chicago’s mid-country location, because of additional business from connecting traffic.
The judicious and well-planned configuration of tall buildings in Chicago's downtown is a necessary condition for co-location of the aforementioned activities. And it is well worth noting that ground transportation and easy circulation are equally necessary to achieve a density that works well. In most instances, the intent of vertical infrastructure is to economize on horizontal transportation costs. Overly congested roadways or poor public conveyance could easily undo these vertical advantages. While average travel times to work in the Chicago area are among the highest in the nation, six-hundred thousand workers do converge on Chicago’s central area each working day, of whom 55 percent of whom use mass transit  .
The conference attendees of the CTBUH will be considering such issues of tall buildings and urban habitat as they meet in Chicago. These issues may even provide welcome relief from a business environment which has, in many instances, left the financing of extant and prospective tall building developments in precarious condition.
 Although Chicago’s manufacturing concentration registered one-third greater than the nation during much of the twentieth century, that sector is now about on par with the nation. However, owing chiefly to national railroad convergence in Chicago, the metro area remains the nation’s premier location for inter-modal surface freight transportation. (Return to text)
 It is Chicago’s core area that is most notable for its density of tall buildings. Over 50 percent of the metropolitan area’s office space can be found in the central area. Nonetheless, employment sub-centers with dense commercial configurations are an increasing phenomenon in large cities. In the Chicago metro area, Dan McMillen’s study finds that such sub-centers grew from 15 in 1990 to 32 by year 2000. (Return to text)
 While we tend to associate tall buildings with large and densely populated cities, it is interesting that we sometimes see tall buildings in rural areas where horizontal travel costs are low (and land rents are cheap). As analyzed by urban economist Arthur M. Sullivan, the logic of such buildings owes to their specialized functions in which people circulate frequently within such buildings to designated sites so that a single multi-story building becomes optimal. For this reason, we may see tall hotels, dormitories, and hospitals even in rural areas. (Return to text)
August 12, 2009
City-Suburban Population and the Housing Bust
Demographer William H. Frey calls to our attention a striking turnaround in population growth in the central cities of metropolitan areas. Since the 2005-06 peak of the housing construction boom in the United States, the growth rates of central cities have begun to gain ground on surrounding suburban areas. Beginning with 2005 and ending with population estimates reported by the Census Bureau for mid-year 2008, Frey illustrates a convergent city-suburb trend for U.S. metropolitan areas having a population over one million. These trends hold for all four major U.S. regions—North, Midwest, South, and West. (The 12-state Midwest population performance is shown below).
Similarly, Frey reports that these gains “are not confined to the very largest American cities. Among the 75 cities with populations exceeding 200,000, 41 grew faster in 2007-08 than in the preceding year, and 54 grew faster than in 2004-05.” We show the population trends for such cities by region below. Once, again, we can see that the turnaround has taken place, on average, in all Census regions of the U.S.
Within the Seventh District states of Illinois, Indiana, Iowa, Michigan and Wisconsin, growth has also tended to rebound in cities over 200,000 in population (below). For the year ending in the middle of 2008, six of seven cities exhibited positive population growth. However, the City of Detroit is an outstanding exception with an accelerated decline in the mid-year ending 2008.
On average, Seventh District cities shifted from zero or negative growth in 2005 to an annual growth rate of 0.5 percent for 2008. The largest swings in performance were registered by Des Moines, with a swing from minus 1.3 percent in 2004 to plus 1.2 percent in 2008, and Chicago, with a swing from minus 0.7 in 2005 to plus 0.7 for 2008.
Click to enlarge.
At this point in time, the reasons for this shift toward central cities remain open to speculation. But given the timing, there are strong reasons to believe that the housing bust lies behind much, if not most, of the reversal. A general rise in demand for housing, such as that which occurred earlier in this decade, exerted a magnified impact on the fringe of urban areas. Given the lower price of land on the fringe and the ease with which larger single family homes can be constructed there (rather than tear-downs closer in), both population and housing generally shifted towards the periphery. Construction jobs related to fringe development likely bolstered the trend, as some households followed job opportunities to the suburbs. And now we may be seeing a reversal of such trends as home demand and employment have fallen off.
William Frey also attributes the urban population resurgence to the nature of the urban economies, citing “broad economic diversity at a time when smaller cities … are vulnerable to economic shocks” and the “resiliency of large urban centers that are economically and demographically diverse.” There may be some wisdom in thinking that this is so. In pursuing economic development, central cities have been trying to attract and grow “Eds and Meds,” (education and health care). As measured by George Erickcek and Tim Bartik of the Upjohn Institute, health care and hospitals, along with colleges and universities have been a bulwark of the economic base of many cities. These sectors of the U.S. economy have tended to grow and expand consistently, and cities have benefited. From the 2000 Census, Bartik and Erickcek report that earnings derived from the education sector are, on average, 36 percent more concentrated in the principal cities of the nation’s 283 metropolitan areas. Health care earnings are 12 percent more concentrated.
Nonetheless, with the release of the next mid-year Census estimates (for 2009), it will be interesting to see if central cities are able to sustain their momentum of population growth in relation to suburban areas. Beginning with 2009, the influences of the sharp U.S. recession and related job declines may become important.  Favoring central city economies, the education and health care sectors are steady performers even in recessions. So too, many central cities no longer host manufacturing production, which tends to be hit particularly hard during recessions. However, in many cities other elements of the economic base are both concentrated and highly sensitive to economic downturns. Such sectors include professional and business services, law, tourism/business travel, and especially the financial sector, which has been buffeted by the recent financial crisis.
Little evidence is available so far concerning the differing impact of the two national recessions, 2001 and the current one, on city versus suburb. However, in a recent report by the Metropolitan Policy Program at Brookings, Elizabeth Kneebone and Emily Garr report on year-over-year unemployment rates for city versus suburbs in the nation’s 100 largest metropolitan areas. They find that “in contrast to the last recession,” when city unemployment rates rose more sharply versus their suburbs, “unemployment has increased at nearly equal rates in cities and suburbs.”  The table below excerpts the year-over-year rise in unemployment rates for cities and their suburbs for several Seventh District cities and their suburbs and for the four major regions of the United States.
Note: Thank you to Emily Engel and Matt Olson for assistance.
The difference in the gap between the two recessions is not large. Year over year changes in unemployment rates in cities rose by 1.9 percent in primary cities versus 1.4 percent in suburbs from May 2001 to May 2002. For May 2008 to May 2009, year-over-year rates rose by 3.9 and 3.7 percentage points, respectively, for cities and suburbs. However, city/suburb unemployment rate differences in level are wider currently than in the 2001-02 period.(Return to text)
May 21, 2009
What are the opportunities in central cities?
Since at least the 1960s, central cities of large metropolitan areas have experienced challenging times. In many cases, large shares of the population and jobs have shifted from these central cities to their suburbs. More recently, over the past two decades, central cities’ travails have eased somewhat; the declines in the number of households and jobs have abated, and in some instances, these negative trends have reversed. Understanding the reasons behind these trends can be helpful in fashioning public policies to encourage the redevelopment of central cities.
The Chicago metropolitan area's experience may be especially helpful in informing policy throughout the Midwest states. While the Chicago area has shared a common course of development with its neighbors in the Great Lakes region, its central city has outperformed its counterparts over the past 20 years. The population of the Chicago area’s central city has grown by an estimated 1.9%, or 53,000, since 1990. In comparison, the central cities of the eight remaining largest Great Lakes metropolitan areas have clocked a 9% loss. As for employment located in the central cities, from 1990 through 2004, the Chicago area’s city lost 4.6%, while those of the other areas lost 6.5%.
Why have central cities such as Chicago and the Twin Cities experienced some rebound? Two major reasons have been advanced. For one, it is clear that there has been a reawakening of interest in living in central cities that relates to their unique amenities and features. Gentrification in many cities has focused on those neighborhoods that contain interesting architecture and history—not to mention lively entertainment scenes. In addition, big city mayors have capitalized on renewed interest in city living by lavishing attention on amenities such as outdoor recreation, lively shopping and arts districts, scenic streetscapes and waterfronts, and urban festivals.
In a recent study of residential location in the City of Chicago versus suburban areas, Bill Sander and I document the specific characteristics of urban denizens versus suburbanites for both 1990 and 2000. The importance of city services to households is apparent from our findings concerning their demographic characteristics. For example, with an eye on the quality or reputation of city schools, household adults with children of school age are much more likely to choose the suburbs over the city. As for the general importance of amenities, diversity, and built environment, we find higher educational attainment to positively affect households’ decisions to choose central city residence. In 1990, those with a four-year college degree were no more likely to live in the city; by year 2000, such householders were 4% more likely to live in the city rather than the suburbs.
The education-related aspect of urbanization is evident in the changing composition of Chicago’s residents. In 1990, 19% of all working age adults living in the city had attained a college degree. By year 2000, this proportion had grown to 26%. Gains among the younger adults were most striking. As shown below, for adults aged 25–34, the college attainment share had grown to 39% by 2006. Growth since 1990 in college attainment of young adults living in the city reversed the suburban advantage of 1990. On average, by 2006, college attainment of young adults in the city exceeded that of their counterparts in suburban areas. The number of those with a bachelor’s degree residing in the city grew by over 50% over the 1990s (not shown) .
It is a mistake to attribute too much of the rising urbanization of college-educated householders to the siren call of city lights, museums, and lakefront parks. That is because job location also strongly pulls along residential location (and vice versa). Through a job channel, the rising importance of information exchange in the U.S. economy may be the second vital large force that may be reviving central cities. New ideas, their dissemination, and the coordination of a complex worldwide economy have come to dominate economic output in developed nations; therefore, the siting of jobs and meetings of workers in dense configurations, some have argued, augments productivity and value generation. Central city location of work has become more desirable, which has pulled some jobs back toward the center of metropolitan regions.
There is some evidence of this renewed role of central cities. At the same time that many central cities have shed some types of routine production jobs, gains have been made in occupations and industries that are steeped in workers who engage in information exchange and interaction. While the City of Chicago has been shedding manufacturing jobs—one of its historic mainstays—it has largely replaced such jobs with those in nonmanufacturing sectors. As shown below, city job losses are largely accounted for by the manufacturing sector alone; in fact, the city has experienced overall growth in employment net of manufacturing. More specifically, (not shown) over the period from 1991-2002, central city Chicago realized strong job gains in such industry sectors as business services (+34.4 percent), securities and commodities brokers (+61.8 percent), educational services (+25.1 percent), and engineering and management services (+13.6 percent).
In our recent investigation of household preferences for city versus suburban residence in the Chicago metropolitan area, we account for the proximity of households to their place of work. Once we statistically account for those city residents who also have found employment in the city, our estimates of the importance of educational attainment on household location in the city are somewhat smaller than we originally estimated. More importantly, "place of work" statistically explains much of the central city residential location decision. For this reason, we should not put too much emphasis on the importance of household amenities to central city living, nor perhaps should policymakers; jobs and job-attracting features continue to be important.
At this point, not much is known about the extent to which the changing economic structure of central cities is actually generating new jobs in related fields and transforming economic bases. And so, leaders and analysts in other Great Lakes cities are looking at the Chicago experience for insights as Chicago pursues policies to refashion itself as a “global city,” in both its residential amenities and in its attractiveness to highly skilled service industries that trade in world markets. Research initiatives that can discern the importance of the city as a job location from a residential location will be especially helpful to city mayors and other policy makers.
Not all of these gains reflect shifting preferences toward the city. Gains in overall educational attainment of the general population, especially young adults, enlarged the population of those adults that were, in turn, more likely to choose urban residence. (Return to text)
October 30, 2008
Chicago Business Cycles--Now and Then
Downturns in economic conditions often come as a surprise. In fact, time lags between statistical releases and the conditions that they reflect can mean that economic slowdowns are not known until months after they have begun. Statistical information covering individual reasons tends to be worse in this regard.
Today there is, however, a widely held view that the U.S. economy has slowed sharply and that economic conditions will not immediately improve. Broad-based measures of national economic activity, such as the Chicago Fed National Activity Index (CFNAI), indicate that U.S. economic growth is well below its historical trend. As a result, observers in regions such as the Chicago metropolitan area are preparing for hard times. And they are asking whether they are likely to feel the worse for this apparent slowdown—and how long it will last.
In the Chicago area, memories are becoming dim of those days when the pace of the local economy fell sharply in response to national economic downturns. However, the chart below should remind us or inform us anew of the fact that Chicago’s economy often experienced sharp swings in employment. In the past (especially before 1990), Chicago’s employment base had been steeped in durable goods manufacturing industries, such as machinery and steel, which experienced layoffs and downsizings when the national economy turned downward. Twice during the 1950s, Chicago area payroll job declines approached 5 percent on a year-over-year basis as national job declines reached 3 and 4 percent on those two occasions. Chicago fared little better during the recessions of 1970–71, 1974–75 and 1981–82.
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Given this track record, it may seem pointless to ask how the region’s economy will fare in the months ahead. However, the question is well considered both because the economic structure of our economy is always changing and because no two economic downturns are alike with respect to their causes and impacts on industries.
Chicago’s economy is continuing to restructure in several important ways. Most dramatically, the region’s employment structure no longer concentrates directly in manufacturing. As recently as 1969, 30% percent of the Chicago metropolitan statistical area’s employment could be found in manufacturing in comparison with 24% for the overall U.S. By 2005, manufacturing’s share of employment had fallen to 9% percent and it had converged with the U.S.’s percent share. At least this element of sensitivity to national business swings seems to have partly abated.
At the same time that manufacturing has waned, the Chicago area has also restructured into higher-order professional services, business meeting and travel, and financial services. (The chart below indexes the Chicago area payroll employment by major industry sector. An index value greater than 1, for example, indicates that Chicago’s employment base in that sector exceeds the national average.) Especially during the 1990s, the metropolitan area experienced very rapid growth in these industry sectors. This expansion was thought to have been accompanied by geographic changes. In particular, while Chicago’s services industries had historically grown and developed through its local trade linkages with Midwest goods producers, business and financial services were now thought to have strengthened and lengthened their ties with international and U.S. cities and regions. If this were actually the case, the traditional patterns in which Midwest manufacturing production declines are strongly transmitted through Chicago’s services industries would have weakened.
To the contrary, the subsequent experiences of the recessionary period of 2001 and its aftermath tend to suggest that Chicago’s restructuring into business and financial services has not buffered it from national business downturns. As measured by total payroll jobs, the Chicago area’s decline of 3 percent in 2001 was at twice the pace of the national average (see chart below). And if the professional and technical services sector has become Chicago’s new bellwether, its performance during the past downturn is not encouraging. From a year-over-year growth peak of 7 percent in 1999, Chicago jobs in the professional and technical sector fell by over 8 percent during 2002. Though we may not think of these services as being sensitive to the general level of business activity, their responsiveness to business swings is much like producers of investment goods and capital equipment. That is, firms tend to expand their purchases of professional services such as advertising, marketing, business meeting travel/convention, and management consulting when they are expanding their markets and investing, but they tend to retrench their purchases of such services when they are retreating.
More generally, although Chicago has broadened and diversified its economy, many of its hallmark sectors remain sensitive to swings in the overall economy. According to the chart above, Chicago remains concentrated in manufacturing. So, too, Chicago remains a goods transport and distribution hub for manufactured goods that are both domestically produced and internationally traded. While many of the area’s services such as education and health are somewhat impervious to general slowdowns, many of its business services are volatile, depending on the fortunes of Midwest goods-producing sectors and, increasingly, on the prosperity of national and international customers.
Chicago also maintains high job concentration in financial and insurance sectors. Unlike the job bases of the New York and Los Angeles metropolitan areas, Chicago’s job base is not greatly exposed to the most adversely affected subsectors of financial services—namely, investment banking, securities dealers, and mortgage finance companies. That said, the remaining financial services subsectors are not expected to be sources of net job growth in the months ahead.
Note: Thanks to Emily Engel for assistance.
August 13, 2008
Energy Prices and Where We Live and Work
For those of us who are aged 50 and older, it is easy to forget that younger generations did not experience the energy crunch of the 1970s nor the many (often failed) public policy responses to the OPEC oil price run-ups. With today’s similar developments in energy markets, it is fascinating to compare the two eras. In some ways, history repeats itself. In other ways, it does not.
The auto industry upheaval appears to be repeating the 1970s. As then, domestic automakers (and their fuel-consuming fleets) are suffering dearly from the sudden hike in gasoline prices; foreign-domiciled automakers, not so much. In both the 1970s and today, the vehicles of Asian automakers tend to be smaller and more fuel-efficient. Unlike the 1970s, however, today even Toyota is paying for its lurch toward large vehicles such as its large pickup truck, the Tundra.
Another apparent similarity between the eras is that some analysts are predicting that rising fuel costs will reshape our patterns of living and working toward more compact urban forms, to the detriment of far suburban and rural areas. However, the actual shifts that took place in the landscape of America surprised us somewhat during the 1970s and early 1980s.
The U.S. was already well-suburbanized by the mid-1970s. But in response to higher fuel prices, it was commonly thought that beleaguered central cities were in store for some respite from the population flight that they had been experiencing. With their denser housing patterns, high job concentrations, and well-developed public transit systems, large cities would offer shelter from high gasoline prices. In suburban and rural areas, where driving distances were long, residents would pay the price. The pace of suburban sprawl would slow, the pace of rural shrinkage would accelerate. For those of you too young to remember, these predictions did not come to pass.
These same predictions are being made today as gasoline prices have doubled. In a recent study, Joseph Cortright offers evidence that shifts toward more compact cities are already underway, as households eschew housing on the urban fringe where commuting distances are long. Indeed, in large metropolitan areas like Chicago, housing prices in closer-in neighborhoods have been holding up relatively well over the past year. The era of urban sprawl has been pronounced dead, with households and employers expected to favor greater density as a way to economize on energy-related travel costs.
However, the contrast between expectations in the 1970s and what actually came to pass may give us pause in assessing today’s predictions. Just the opposite took place in the 1970s era. Central cities of large metropolitan areas, especially in the Northeast and Midwest, experienced their worst decade of the century. Population tended to flee to the suburbs, especially middle and upper middle income residents. The apparent reasons for flight included rising crime, school desegregation, and the near-completion of an interstate highway system that funneled homeowners to cheap and abundant housing on the perimeter.
While rural areas in some areas of the U.S. did continue to decline, on the whole the 1970s was hailed as the decade of the “urban to rural turnaround.” The charts below indicate population growth over past decades for metropolitan versus nonmetropolitan counties. Though energy expenditures were higher on average for rural households, rising energy prices for coal, natural gas, and petroleum raw materials spurred a boom in exploration and mining in many parts of the U.S. Rural rebound was also spurred by a resurgence in prices and exports of agricultural commodities and processed foods. The falling exchange value of the dollar against world currencies following the dollar’s detachment from gold in 1971 was accompanied by favorable prices for U.S. foodstuffs on global markets. Faltering agricultural production in some foreign nations such as the former Soviet Union contributed to rising U.S. farm income. So too, thanks in part to the interstate highway system, some types of manufacturing began to discover rural areas as hospitable sites for production.
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Will these surprising patterns repeat themselves in the current era of high prices for energy materials? Rural areas are once again finding themselves amidst an energy and food commodity boomlet. Surging agricultural demand from developing nations has contributed to rising U.S. exports and commodity prices. The falling value of the U.S. dollar since 2002 has also contributed, as have the U.S. legal mandates and subsidies for the use of corn-based ethanol as a transportation fuel. In the Seventh District, the growth pattern in farmland prices looks much like the late 1970s and early 1980s, rising at double digits annually through the decade.
In other regions, coal mining and energy exploration activity are buoyant.
However, this time around, conditions would seem to favor central cities versus rural and far suburban areas more than in the 1970s. Rates of crime declined over the 1990s in most major U.S. central cities. Central city schools continue to struggle to educate and graduate low-income students, in particular. Yet, most such school systems enjoy greater financial stability, and many have innovated and expanded their offerings to serve populations who are diverse culturally, as well as economically. Rather than shunning large cities, many highly educated households are finding the older architecture, diverse community, and rich array of amenities in central cities attractive. To some degree, employers have followed educated employees back into central cities; or they have found that the density of the central city makes for more productive business activity in the “new economy,” which rewards face-to-face contacts in conjunction with sophisticated telecommunications. Should these recent trends continue, higher gasoline prices may only add one more advantage to the higher density of older central cities.
These trends may leave some suburbs on the fringe as the losers in the current era. The map below illustrates the average commuting time for suburban areas of the Chicago metropolitan area. Many households who buy or rent in suburban areas choose the low housing prices that such areas offer at the expense of longer trips to work. The sudden rise in gasoline prices may have left many such households with larger shocks to household budgets than their more urban counterparts. The Center for Neighborhood Technology in Chicago has constructed neighborhood maps of U.S. metropolitan areas which estimate average household expenditures for commuter travel. For Chicago and most other metropolitan areas, these estimates show that average household energy expenditures climb on the fringes of metropolitan areas. Even as measured as a share of household income, far-suburban households are more severely affected by rising fuel costs.
Some revisionist interpretations of the 1970s experiences of “urban to rural” turnaround have also been made by analysts such as Paul Gottlieb. And it seems that the turnaround of that period has been overstated by an inherent bias of measurement—the tendency to overstate the population growth of nonmetropolitan counties during periods in which household growth is robust nationally. In such periods, population growth in nonmetropolitan counties can flip their defined status from nonmetro to metro, thereby inflating the measured pace of growth in consistently defined “nonmetro” counties.
Given the experience of the 1970s, it is difficult to draw firm and rapid conclusions concerning whether an era of higher fuel costs will reshape our urban, suburban, and rural landscape and, if so, how. To be sure, higher fuel costs have changed the desirability of work and residential locations. But we also know that households and businesses can adapt to such marked price shocks in other ways than moving. In particular, as today’s fleets of autos and trucks wear out, they will surely be replaced by more fuel-efficient vehicles, thereby allowing many long commutes and delivery trips to resume at moderated cost. Such was the case following the energy price shocks of the 1970s.
Note: Thanks to Vanessa Haleco-Meyer, Bill Sander, and Graham McKee for comments and assistance.
May 14, 2007
Congestion tolling and privately operated roads—An idea whose time has come?
As our roads become increasingly congested, tolling and privatization of highways will be increasingly important lifelines, especially for large urban economies. The idea that motorists should pay tolls when driving on congested highways has long been advocated by economists. Conceptually, the “public” part of highway transportation is limited to the necessary intervention by public authorities to strategically acquire land for transportation and assure that all have access to travel freely in pursuit of commerce and recreation. However, the individual’s use of a roadway is often “private” in that it imposes congestion costs on other drivers (and some pollution as well). That is, in the motorist’s decision to use a road, the individual driver does not consider the congestion costs imposed on other drivers, thereby leading to the overuse of limited public roadway capacity. As a remedy, congestion tolls bring these individual driving decisions back into line with the greater public good. As the degree of road use (and congestion) varies by time of day and by day of the week, so should the amount of tolls vary accordingly.
After a long hiatus, interest in congestion tolling and privately operated roads has been climbing. European and Asian cities have made innovative headway in congestion fees. Both Stockholm and the City of London have implemented motor vehicle charges for the privilege of access to their central area; so has Singapore. Most recently, New York City has proposed to charge auto motorists $8 for the privilege of driving around Manhattan during peak traffic hours, with higher fees for those driving trucks.
Such actions are largely being spurred by rising congestion—which did not materialize overnight. The Texas Transportation Institute (TTI) creates a “travel time index” that indicates the relative change in travel time from peak traffic to free-flow traffic. In a TTI report, Chicago in 1982 had a travel time index of about 1.2, meaning that given a 40-minute commute during a free-flow period, a person driving during peak hours would drive about 48 minutes (20% longer than it “should” take). This had climbed to 57 percent longer by 2003. In four major cities of the Seventh District, the added time to a commute during peak hours has increased from 14% in 1982 to 46% in 2003.
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Prior to the recent spate of toll programs, some highway authorities experimented with non-price-rationing measures such as “high occupancy vehicle” (HOV) lanes. To curtail congestion, HOV lanes set aside and dedicated freeway lanes to those vehicles, including cars and buses that have multiple occupants. Unfortunately, the results were sometimes disappointing in relieving congestion because HOV lanes merely attracted vehicles that already contained multiple occupants, without prompting a significant number of single-passenger motorists to carpool. So, too, the dedicated HOV lanes, while often uncongested, tended to push even greater congestion onto unrestricted lanes of the highway.
In response, the so-called “high occupancy toll” or HOT lanes have sometimes been called into action. HOT lanes are essentially HOV lanes that allow single-occupancy vehicles to motor in them—but for a price.
What has brought us to this state of affairs? Under the best of circumstances, motorists prefer to drive when and where they choose at no charge. But Americans’ penchant for driving has far outrun our financial ability to build roads. Lifestyle changes have tremendously raised the miles traveled in cars by U.S. households. Rising household incomes have lifted the desires for ever larger houses and lots, which are, in turn, often satisfied by homes located quite far from work sites. In addition, owing to the desire for residential privacy, homes are often built on dead-end or nonthrough streets, which has aggravated traffic on the major arterial roads surrounding residential communities.
Also, the rising trend of two-earner households makes it difficult for both earners to simultaneously live near their workplaces. More generally, there are extensive logistics (and driving miles) for today’s American family to coordinate their many trips for work, shopping, education, and recreation. By one estimate (DOT), highway travel miles climbed 23.4% from 1995 to 2005 in comparison to a population increase of 11.4%. To accommodate such rising traffic, road expansion has climbed by only 2.6% over the same period.
Many observers recognize that improved community land use planning could help curtail our appetite for driving. For example, allowing developers to build high-density apartment-type residences around existing commuter rail stations would allow at least one of a household's commuters to keep a car parked during the workday commute. So, too, stronger community planning efforts to assure that households of modest means can find affordable housing could help curtail the need for very long commutes. In the Chicago area, for example, policy think tanks such as Chicago Metropolis 2020 and the Metropolitan Planning Council spearhead efforts and programs that promote such community planning. Still, however sensible such planning may be, there has been very little of it implemented in many U.S. cities to date, and so, the increased commuting has often overtaken existing roadway capacity.
In past decades, state governments have often tried to keep pace with rising demands for driving and for far-flung housing by building more roads, including freeways. Several forces are now conspiring to slow such construction, especially tight fiscal conditions. The primary source of highway grant assistance to states, the Federal Highway Trust Fund, is replenished from the federal tax on gasoline. But the tax of 18.4 cents per gallon has not been raised since 1993 so that while revenues do rise somewhat along with vehicle miles traveled, they do not keep pace with rising gasoline prices and higher milage automobiles. Meanwhile, the revenue resources of state governments have also been besieged. Many state gasoline taxes are themselves imposed on a stagnant "cents per gallon" basis, and the voting public strongly resists the raising of gasoline taxes—especially as motor fuel prices have put increased pressure on household budgets over the past three years.
This leaves state government officials in a quandary, since the costs for competing public services, especially health care, education, and prisons, are concurrently squeezing state budgetary funds. State and local governments are hard pressed to even maintain existing highways, let alone fund expansions to curtail growing traffic congestion.
In addition to charging tolls, elected officials are also responding by increasingly turning to the private sector to assume responsibilities that include the financing, planning, marketing, construction, operation, and pricing of roads and bridges. Many combinations and arrangements of these functions are being attempted, from simple outsourcing of management and toll collection of highways to the all encompassing long-term leasing of highways as a publicly regulated private business entity.
Increased congestion and financial stress are not the only reasons behind the privatization and tolling of transportation infrastructure. New and improved technologies for payment of highway tolls have recently come to the fore. In contrast to the driver of yesteryear who had no option but to deal with the delay-plagued coin and cash toll booths, today’s driver can often make payment with little or no slowing down. Toll payments can be made online by transponders carried within vehicles or offline by remiote reading of license plates.
Seventh District initiatives lie at the recent epicenter of these movements in the U.S. In particular, the City of Chicago entered into a 99-year lease to a private consortium in 2005, turning over operational responsibility for and revenue returns from an 8-mile stretch of toll highway called the Chicago Skyway. By many accounts, the City benefited greatly from this transaction, while the public interest of drivers was also well served by enhanced operational efficiencies. The City of Chicago used income from the deal to retire existing debt on the Skyway infrastructure, and with the remaining revenue, it also set up a trust fund and purchased a sizable annuity that will help finance the city’s general operating funds well into the future. The driving public now enjoys rapid roadway maintenance and toll collection and eased congestion, albeit with prospective increases in toll fees.
Following Chicago’s lead, the Indiana Finance Authority leased its east–west toll turnpike for $3.8 billion in 2006. In large part, Indiana will use the proceeds to fund and maintain highway infrastructure throughout the state.
Meanwhile, in an effort to reduce rush-hour congestion around the Chicago area, the Illinois Tollway Authority introduced differential time-of-day pricing for only trucks in 2005. This program also doubled tolls for drivers in autos who choose to pay by cash at toll booths rather than by electronic transponder as they drive through rapidly. Revenues from these schemes are being used for repairs and expansion of the tollway system; they are also being used for the capital costs of new and reconfigured “open road” (or no-stop) toll collection system, which enables vehicles to pay tolls while traveling at highway speeds.
As the Illinois Toll Authority and other examples show, privatization and tolling of roads are separable actions. But in some ways they reinforce one another. Turning one’s operations over to private companies may provide one way to overcome the public’s resistance to congestion pricing, especially in contrast to government authorities who may be encumbered or distracted by non-transportation responsibilities or political constraints (i.e., the lack of political will to appropriately price use of the asset). Privatization potentially may also allow the operational authority to change pricing regimes and payment technologies more quickly in response to changing roadway conditions. Also, cost efficiencies and service quality are presumably improved when private agencies are watching the bottom line, though this has not always proved to be the case.
Still, the issues inherent in privatization schemes are contentious with respect to both purported operational efficiencies and sound fiscal management by governments. In awarding operational and pricing autonomy to private companies, it is not always clear whether the public interest is less than optimally served in favor of the profitability of the private operator. In particular, monopoly-type pricing by a private operator may be worse than publicly directed underpricing of congested facilities. Similarly, the data collected from the publicly rather than privately operated system may be more readily available for systemic public land use and transportation planning across entire metropolitan areas. For these reasons, as they enter into such partnership arrangements, elected officials must carefully craft contract terms and then follow up by monitoring the private companies during the terms of the contract.
Other concerns center on the behavior and actions of governments when they first enter into such agreements. Upfront revenue windfalls from the leasing of public infrastructure may cloud the judgment of governments and elected officials. Without proper disclosure and oversight of government by the public, the sale and leasing of transportation infrastructure to private buyers may pander to the near-sighted proclivities of elected officials. To plug current budget holes, or to plump up current spending for self-motivated reasons, public officials may unwisely commit large revenue streams immediately received from the sale or lease, while concurrently widening future budget deficits by eliminating public revenue streams. As always, the voting public and their representative think tanks must be on guard to oversee the terms of public–private partnership arrangements.
Elected officials must also represent and protect the public’s interests in matters of fairness and equity. Lower-income households are those who will be disproportionately burdened to pay for the use of less-congested roadways. In many ex-urban and suburban places, lower-income households must travel long distances to access their workplaces. Equity concerns are often compelling, since these workplace commutes are often lengthened by land use restrictions undertaken in high-income communities that limit the availability of affordable housing near work sites.
In response to equity concerns, some states and localities are adding capacity and subsidies to public transportation—both light rail and buses. When funding is short, as it usually is, governments often earmark part of highway toll revenues to such dedicated purposes.
However, for many households, public transportation is not an option. According to the 2000 U.S. Census, only 4.7 percent of workers currently use public transportation. The table below shows average usage of public transportation for Seventh District states. Public transportation is, of course, more viable in densely populated places, including large cities such as Chicago. Since large cities also coincide with highway congestion and tolling practices, the use of tolls to fund public transportation subsidies will work better there.
The use of congestion pricing, privatization, and new payments technologies remain in their infancy. Yet, because of the ever-increasing demand for driving, accompanied by little highway expansion and poor land use planning, heavy congestion will soon be a reality in many communities. For this reason, the Federal Reserve Bank will hold a one-day workshop this June to understand how pricing schemes, public–private partnerships, and emerging payment mechanisms can be used to address congestion and efficiency in commuter networks.
April 13, 2007
Financial Services Employment Growth in Chicago
Financial and insurance activities have historically concentrated in cities. In large part, this location tendency follows from the deep and broad information that is needed in allocating capital to those endeavors of highest return. Owing to their intense human interaction, large cities are advantaged in gathering and processing information about potential investments, and in matching specialized financial market participants on both sides of financial transactions.
Although it might seem otherwise, the heightened ease of global trade and communication in recent years has done nothing to break loose the urban advantage in financial services. To be sure, technological advances in information technology have lowered the costs of transmitting information over long distances, thereby allowing some financial functions to disperse to less urban areas. For example, routinized activities such as the processing of insurance claims and billing invoices can now be more cheaply carried out in small U.S. cities or even overseas. However, to the contrary, the complexity of financial transactions has grown considerably, putting a high premium on the advantages of urban location as the domicile for many higher order financial transactions and for highly skilled financial workers and entrepreneurs.
As the fourth largest metropolitan area in the world, measured by total annual output, the Chicago area harbors some hopes for a strong and growing financial services sector. Chicago has long served as a significant regional financial capital for the Midwest, especially in banking and insurance. So too, its risk management exchanges and member firms have evolved these particular specialties into industries of global reach and employment. Accordingly, while Chicago’s economic roles in manufacturing and other activities have waned, Chicago’s stature in financial services remains highly important in supporting the region’s economy. For 2005, financial and insurance payroll jobs amounted to 246,000 in the metropolitan area, comprising 5.8 percent of the total job base.
The current industry classification system (NAICS) breaks down financial services into three parts: Credit intermediation (NAICS 522), Securities and Commodities Contract Brokerages & Other Financial Services (NAICS 523), and Insurance Carriers and Other Activities (NAICS 524). “Credit intermediation” includes commercial banking along with credit card issuing, consumer lending, sales financing and mortgage lending. NAICS 523 includes not only stocks, bonds, commodities brokerage and exchanges, but also investment banking, portfolio management, and investment advice.
Using payroll employment by industry as a measure, the graph below displays the relative concentration of large U.S. cities in these industries versus the overall U.S. economy. An index value of one indicates parity with the U.S. in the industry’s job concentration; a value exceeding one indicates that the city’s employment concentration exceeds the U.S. For example, a value of two indicates that a particular industry concentrates twice as much employment in the city as compared to the U.S.
Generally, Chicago and other large metropolitan areas are seen to concentrate more highly than the U.S. across major financial industries. The Chicago area’s payroll employment index registers a value of 1.33 for 2006, indicating a concentration over the entire 522-524 sectors that is 33 percent more concentrated than the U.S. (This concentration was approximately the same as back as 1990).
The Chicago area’s sharpest employment concentration lies in the NAICS 523 sector, securities and commodities brokerage etc. with an index value of 1.96. In large part, this derives from the city’s world-prominent risk exchanges and their member firms. In addition, however, concentrated sub-sectors also include investment banking, portfolio management, and investment advice.
In addition to these activities, Chicago’s economy also concentrates employment in insurance related sectors (NAICS 524, an index value of 1.15) and credit intermediation (NAICS 522, an index value of 1.30).
Despite some ups and downs, Chicago’s financial sector employment has contributed to the city’s growth. As elsewhere in the U.S., the wave of banking deregulation led to profound consolidation during the 1990s. During the era, the Chicago area experienced employment declines in NAICS 522 concurrent with waves of bank acquisitions, mergers, and attendant consolidation. Since then, Chicago area employment in credit intermediation businesses has grown. For one reason, in a recent study, Tara Rice and Erin Davis document the proliferation of commercial bank branches in the Chicago region. Previously, severe legislative restrictions on the branching of banks in Illinois resulted in an underserved population.
Similar performance experiences befell Chicago’s risk exchange community during the late 1990s and early years of this decade. Prior to their recent structural re-organization and successful adaptation to electronic trading, Chicago’s risk exchanges stagnated as emerging exchanges around the world gathered market share from them. Since then, Chicago’s risk exchange and risk management community is once again expanding, including firm spinoffs into emerging business lines and technologies. One recent study entitled “Exploring Entrepreneurship: The Chicago Futures Trading Industry” documents the spawning of local economic ventures centered around “technologies developed to enhance the buy-side of trading as well as post-trading management and technologies that cope with the increasing volume of market data that is being generated through electronic trading.”
Through such upheavals, the graph below shows that finance-insurance employment growth has kept pace with overall job growth in the Chicago metropolitan area over the longer term. Employment in the insurance arena has declined 10 percent since 1990. However, these losses were made up for by growth in both remaining financial sectors. In particular, job growth in the securities and commodities sectors expanded by 30 percent since 1990, an increase of about 10,000 jobs.
In more recent times--since year 2000, all three finance and insurance sectors are helping to pull along the Chicago area’s labor market. On an annualized basis, in 2006 Chicago’s total payroll job levels across all sectors, financial and otherwise, remained 2-3 percent below the peak year 2000. Yet, financial and insurance sector payroll employment jobs has risen 5 percent over the period.
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How important is this financial service performance to the Chicago regional economy? In some measure, Chicago’s financial industries serve the surrounding Midwest region and its industries which would suggest some drag on Chicago’s financial sector activity. Yet, despite slow growth of the broader Midwest, Chicago’s financial and insurance sectors continue to expand payroll. Such growth bears watching. Averaged across all sectors, payroll jobs in the NAICS 522-524 sectors carry an average annual payroll that is 75 percent above the region’s average annual payroll per job, clocking in at more than $81,000 per payroll job in 2005.
March 13, 2007
Higher Education and Chicago’s Development
With economic growth lagging in many Midwest communities, institutions of higher education are being asked to play a bigger role in their surrounding regional economies. This past fall, the Chicago Fed held a conference addressing the role of higher education in promoting regional growth and development.
In what ways does higher education fit into the regional development picture? The ways discussed at the conference were many and varied; certainly, one size does not fit all. In places ranging from Silicon Valley to Route 128 in Boston and even to Fargo, North Dakota, universities are transferring technology to industrial facilities in adjacent industrial parks and to fledgling high tech firms. In other places, including Akron, Ohio, and Rochester, New York, universities are active in helping redirect mature but declining local industries into new products and markets. And Indiana’s Purdue University has embarked on an ambitious engagement and outreach mission along several fronts: teaching, discovery, community outreach, and identifying local targets of economic development.
While the conference did not address the university role in Chicago’s growth and development, our outstanding business schools have clearly played a key role. Today, among many fine business programs, the city touts the perpetual top ten national ranking of Northwestern’s Kellogg School of Management and the University of Chicago’s GSB, along with the frequent top ten ranking of Depaul University’s evening MBA program. As we look at Chicago’s industrial and business history, we see how these schools continually pump new life into Chicago’s economy.
For example, advanced business services and corporate headquarters activities are today the hallmark of Chicago’s economy. The city gave birth to some of the most prominent management consulting (NAICS 54161) firms and today continues to host a very significant number of such companies. Chicago ranks third in the U.S. among metropolitan areas in number of management consulting firms, and second in concentration of such firms, at some 120% above the national average.
How did this come about? Writing in the Encyclopedia of Chicago, Christopher McKenna describes the genesis of this Chicago-born industry. “Arthur Andersen, a professor of Accounting at Northwestern University, founded his eponymous firm in 1913. … Arthur Andersen & Co. began to specialize in financial investigations, the forerunner of the modern consulting industry.” And, “instead of employing local banking staff, New York and Boston financiers hired Chicago consultants to analyze the management of Midwestern companies in which they planned to invest.”
Andersen’s initiative was quickly followed in 1914 by Edwin Booz, a recent graduate of Northwestern in psychology. The company eventually became Booz Allen & Hamilton. So too, James O. McKinsey, an expert in cost accounting at the University of Chicago, founded a consulting practice (in 1926) that split off into the firm bearing his name as well as into A.T. Kearney. All became world-wide bulwark companies in what is now a global industry of great strategic importance to the world’s largest companies and businesses.
Jump ahead 50 years to the early 1970s. Chicago’s risk management and risk exchange community was re-invigorated when Leo Melamed, one-time Chairman of the Chicago Mercantile Exchange, launched contract trading in international currencies. Also in the 1970s, a former professor at the University of California at Berkeley, Richard Sandor, helped develop the Chicago Board of Trade’s U.S. Treasury futures contract trading.
Today, Chicago is a global leader in financial futures and options trading, with a 23% global share in exchange-traded contracts measured by volume. In addition to direct employment at Chicago’s exchanges and associated clearing operations, trading activity gives rise to ancillary employment in various Chicago businesses such as banking, brokerage, law, business publication, and computer systems and software.
For this industry too, the University of Chicago figures prominently in the story of its birth. University mentors both espoused the social value of trading financial instruments and also developed mathematical pricing models of assets that served as the basis for some trading. As recently described by Leo Melamed, Nobel Laureate and University of Chicago economist, Milton Friedman was a notable inspiration, teacher, and consultant to the launch of currency futures trading in the early 1970s.
Today, Richard Sandor remains busy in Chicago developing a new industry that addresses global climate change by capping polluting air emissions among member firms and then trading credits for pollution reduction among these firms.
Meanwhile, students from Chicago area business schools, such as Joe Mansueto of Morningstar, have recently grown new industries, this one centering on the tracking and analysis of mutual fund products.
In contrast to places such as the Stanford-Silicon Valley area, Chicago is not especially recognized for research and science-based commercial spinoffs from its universities. But several local universities are attempting to marry their business curriculums with their science and engineering activity. For one, the College of Business at the University of Illinois Chicago (UIC) is training future business leaders by encouraging them to construct business plans for inventions and intellectual property coming out of UIC labs. One recent sale of note involves a product that will possibly halve the time it takes orthodonic devices to straighten teeth.
What does this history imply for public policy? For starters, if we are to interfere effectively for purposes of economic development, we surely must understand the nexus among our assets and institutions. Chicago is clearly a “business town,” and its business schools have not only supported the business climate by training graduates for local companies but also indirectly by spinning off new businesses and industries.
But in considering issues of greatly enhanced public support or subsidy, it would be a mistake to attribute too much to universities alone. That is because causation goes both ways. While Chicago’s business schools have spawned much local growth, so too has local business growth created and supported the growth of universities and business school programs.
A city’s assets and institutions are best thought of, perhaps, as enjoying a symbiotic relationship. Accordingly, local public policy should start by strengthening inter-connections among local enterprises and enterprising people. Government likely has no great ability to pick and choose which particular connections to strengthen. And so, the primary course should be to provide desired and cost-effective public services and infrastructure, especially in transportation and communication. Restrained yet well-designed regulation and taxation should be another part of the mix.
Next, public-private programs and civic partnerships may be helpful in drawing closer social and cooperative connections among our diverse Chicago communities, industries, and civic institutions. As Chicago’s business history has shown, some amazing successes can arise from enterprising partners in a dynamic city.
February 12, 2007
Sports Franchises and Urban Development
Are there worthwhile benefits to large urban economies from professional sports franchises and events? Critics are especially hostile to the idea of tax breaks, incentives and other public subsidies to sport franchises and events. At best, they claim that local spending on sports events displaces local spending on other activities, with no net impact on expenditure or income. Worse, they claim that public monies spent or foregone to subsidize sports franchises or events could have otherwise been more productively spent on enhanced public education or the like.
In rebuttal, there is another school of thought that posits that the changing nature of urban economies has heightened the value of recreational amenities as a draw for coveted workers. As the productive basis of city economies has shifted away from the manufacturing and distribution of goods, and towards a greater focus on information exchange by skilled and educated workers, some policy analysts argue that the successful workplace location is now driven by where people want to live rather than by its strategic location for moving materials.
In some instances, major league sports teams and professional sports events, such as the Super Bowl, can be counted highly among cities’ “public goods” amenities that attract and retain productive workers. In this, sporting events may be among several amenities whose sum total is more than the some of the parts because a large city’s varied restaurants, museums, cultural diversity, arts, and sports all go into making it “an interesting and exciting place to live.”
The measurable evidence on this effect is sparse, but several statistical studies have found favorable impacts. A thorough and balanced review of studies has been conducted by Mark Rosentraub. No doubt that many subsidies are ill-conceived. But Rosentraub concludes that the net value of a sports investment by the public sector rests on its context and the particular outcomes for the city and county making the investment. For example, the placement of publicly-subsidized stadiums in downtown areas have been found to help enliven and revive struggling downtowns. Another study found that Indiana residents valued the intangible benefits of having the Indianapolis Colts sufficiently to justify public subsidies. And in a statistical study across metropolitan areas, Jerry Carlino and Ed Coulson found that households tend to pay higher housing rents in metropolitan areas that choose to host sports franchises. Apparently, the value of nearby sports activity affects land and housing congestion that arises as greater population is attracted to such sports-minded places.
Among the most intangible, most difficult-to-measure benefits attendant to sporting events are the advertising or marketing values associated with the opportunity to re-cast a city’s image to a national or international audience. Places whose images become distorted or unfairly known due to their past travails may especially view large sporting events as valuable in setting the record straight.
In particular, an enhanced image may be helpful as businesses consider investment decisions and as workers consider various recruitment offers. The City of Detroit, for example, went to great pains and took great pride in successfully hosting the Superbowl XL in their new stadium situated amidst extensive downtown renewal.
This year’s two Super Bowl contestants, Chicago and Indianapolis, likely welcomed the media coverage of their cities deriving from both the Miami telecast and from national pre-game media hype. Chicago has been working to boost its image as a national and global city having superior amenities and functionality. In fact, it is one of two U.S. cities still vying to host the 2016 Olympic Games.
Meanwhile, Indianapolis has been pursuing sports-minded economic development for quite some time. During the 1970s, the city began to boost its support for amateur sports facilities and events, meeting some success in hosting the Pan American Games in 1987 and, among other things, it is now the headquarters locale of the National Collegiate Athletic Association. During times when high-profile events are not taking place in Indianapolis, its sports facilities are often in use by young athletes who come to town (often with their families), patronizing the city’s hotels and restaurants.
Despite scoldings by the majority of public policy analysts, many of which are well-founded, some cities still see gold in them thar’ games!
January 22, 2007
Chicago's Pursuit of the Global Prize
Policy and business leaders in Chicago continue to advance the metropolitan area’s prospects as a global hub for professional and financial services. This initiative arises from both necessity and opportunity. Chicago’s traditional markets, principally in the surrounding Midwest, are not growing rapidly. At the same time, however, the Chicago economy specializes in advanced producer service sectors that are increasingly traded more broadly and, in many cases, internationally.
As the business service center of the Midwest, serving regional markets and industries, Chicago companies’ prospects for growth are somewhat limited. That is so largely for two reasons. First, the Midwest economic base centers on agriculture and manufacturing. Since productivity growth is so very high in these industries, and competition keeps commodity prices low, income and revenue (and attendant jobs) grow slowly. The second reason is climate. As the U.S. economy restructures toward information industries and knowledge workers, service production is being pulled toward locations where workers prefer to live, often milder climes.
However, globalization of the economy has also brought new opportunities to populous information-based cities like Chicago. Large cities often have wonderful amenities that are not dependent on climate, such as sports, restaurants, museums, and cultural diversity. But more fundamentally, it is because expanding global trade in goods, services, and capital requires the complex and specialized functions and industry sectors that are concentrated in large cities, including legal services, logistics, distribution, finance, insurance, business meetings, R&D, and professional business services.
Chicago has been developing such sectors almost since its inception. Today, Chicago features world-leading risk exchanges, universities, business meeting and personal air travel firms, legal services, headquarters facilities, and management consultancies.
During the 1990s, the growth of Chicago’s professional services was robust. According to the data reported on payroll employment, the Chicago metropolitan area added a net 80,000 jobs in the sector from 1990 to 1999, more than the Los Angeles metropolitan area and more than New York City.
However, since then, job performance in Chicago has often been much weaker, raising doubts about whether the city’s economic structure has divorced itself from the surrounding region as much as previously believed. The chart below displays year-over-year growth in the professional, technical, and R&D sectors. Employment growth experienced year-over-year declines for most of the 2002-2004 period, before reviving in 2005.
How much of Chicago’s business service economy has expanded to global markets or even to other large U.S. cities in the global network?
We know very little about the geography and changing geography of these hallmark industry sectors. However, one informative study by Peter J. Taylor and Robert E. Lang of the Metropolitan Policy Program at The Brookings Institution measures the prominence of major global service companies among large cities in the world.
Taylor and Lang examine 100 global companies drawn from the business or producer sectors of accounting, advertising, banking/finance, insurance, law, and management consulting. For each city, the sum presence of their offices (weighted by size and function) determines a score for a city’s commercial presence and ties to the global city service network.
According to the Taylor-Lang study, Chicago scores high in its global connectivity, both relative to other U.S. cities and relative to the world’s major cities. Among U.S. cities, Chicago ranks second only to New York. Among world cities, Chicago ranks seventh, behind London, New York, Hong Kong, Paris, Tokyo, and Singapore.
The Taylor-Lang study scores Chicago’s connections with domestic cities such as Atlanta and New York in the same way it scores connections with international cities such as Sydney. This seems correct. International borders can be arbitrary. And to otherwise score border-crossings might bias the results toward cities located on continents where national boundaries are near each other, such as Europe.
The study does provide a separate “hinterland” scale for each city, which tries to measure the degree to which a city’s global connectivity relies on nearby national trading relations. Here, with the exception of New York City, U.S. cities tend to be less international than those on other continents. However, Chicago again scores well. It places third among U.S. cities, behind New York and Miami.
How this relates to Chicago’s recent growth performance and prospects is not clear. The construction of the Taylor-Lang study is creative, clever, and somewhat revealing, but it provides more impressionistic than definitive evidence of global linkages among producer services. Those who would like to draw their own conclusions from the evidence should take a look at the authors’ map of each global city’s linkages, including Chicago. Outside of North America, for example, the map suggests that Chicago's economy links strongly with Zurich, Switzerland, and Sydney, Australia.
Chicago’s employment in business-professional services is once again growing strongly, at a 3% annual year-over-year pace. If the recent period of weak performance reflects some unusual and fleeting conditions such as a post 9-11 falloff in business travel and related business service activity, then perhaps Chicago’s march to global success will now continue.
December 15, 2006
A Chicago-Milwaukee Region?
Could cities located near one another, Milwaukee and Chicago for example, enhance their respective growth and development through closer linkages? Why might a greater Chicago–Milwaukee metropolitan area want stronger ties, and what policies, if any, might be considered to bring about such a union?
There are several reasons why larger metropolitan areas are generally leading U.S. economic growth. In recent decades, larger metropolitan areas have typically become more specialized in managerial and technical occupations, while smaller metropolitan economies have become more specialized in production activities. For example, one recent article found that those U.S. metropolitan areas having a population above 5 million had increased their concentration of management to production workers to 39 percent by 1990 from 10 percent in 1950. In part, this increasing concentration in larger cities is due to advances in communication and transportation that have allowed companies and organizations to administer and manage from a central location or to travel easily to multiple production locations.
In this light, it is understandable, then, that larger cities have also tended to grow more rapidly in terms of income and/or population. That is because specialized professional and managerial occupations tend to pay more than production. Moreover, since at least the late 1970s in the U.S., economic returns to labor, including wages and salaries, have generally been growing faster for managerial, technical, and other occupations attendant to higher educational attainment.
A second reason for such shifting specialization and growth owes much to the growth in work force participation of women. In the U.S., the labor force participation of working age women rose from 37.7 in 1960 to almost 59.6 percent today. Moreover, the educational attainment of women has also been rising such that it now exceeds men among the younger age cohorts. Since young singles tend to marry someone with similar education, this has given rise to growing numbers of “power couples” who often must find not one, but two, specialized jobs in the same labor market. Because large metropolitan areas have both deep labor markets and more specialized occupational opportunities, these places have become magnets for such “power couples.” In turn, firms respond to the greater labor supply of professionals by siting their establishments in larger metropolitan areas, and thereby transform local economies.
There are several reasons to keep an eye on the greater Chicago and Milwaukee areas to examine the prospects that they will someday become a single labor market and benefit from the attendant economies of larger scale and scope of such a merger. The Chicago and Milwaukee areas are only 86 miles apart, as measured from city center to city center. The Chicago metro area is more populous at 9.4 million as compared to 1.5 million in Milwaukee, but together they yield a population of 11.0 million.
Historically, Chicago–Milwaukee work force linkages have been limited. Only 13,000 Milwaukee residents commute to Chicago, daily, as of year 2000, up from 1,600 in year 1990. The reverse commute is even smaller. However, commuting in both directions is growing rapidly.
Still, a closer look at some important subsectors of professional industry workers is suggestive of the greater work force that may soon arise from combination. The chart below combines industry employment for Chicago and Milwaukee metro areas across several professional, management and business service sectors. As combined, for example, employment in the Chicago–Milwaukee “computer systems design” sector would rank second to New York, allowing Chicago to bypass both the San Francisco and the Los Angeles metro areas. Other sectors of mutual benefit in Chicago and Milwaukee can be seen at the Midwest Economy website.
While such stronger within-industry labor markets might be advantageous, the additional attraction across multiple sectors may be greater still. For households with members having differing but specialized occupations, the possibilities for a multiple match of people with jobs in a combined Chicago–Milwaukee metro area labor pool could be great. This would enhance companies’ ability to attract and retain skilled labor in both regions.
So too, not all jobs within the professional and business services sectors require the very highest educational attainment. For example, according to recent estimates of the U.S. Bureau of Labor Statistics, office and administrative support jobs comprise one-third of all employment in the combined professional services, finance, and management of companies when measured in industry sectors. So too, spin-off employment would also generate a wide range of local employment as the spending of added service professionals ripples through the local economy. This feature is especially important since job needs are great for lesser-skilled labor in both markets.
How might Chicago and Milwaukee push along their destiny as a combined metropolitan area? One low-cost way is to publicize their mutual proximity in marketing each region to prospective employers and to job recruits. Both Chicago and Milwaukee are highly active in economic development marketing. Of course, private sector employers and employment intermediaries may also be effective in spreading such information about the greater breadth of employment opportunities.
Another policy avenue may be greater investment in transportation between the metro areas that would facilitate commuting flows. Both interstate highways and train transportation are now in service. The possible labor market advantages of easier and more dependable auto and passenger train travel might weigh significantly in the consideration of any future roadway/rail expansion and maintenance decisions. Combined efforts in applying for federal transportation grant monies to serve a large and more closely-integrated Chicago–Milwaukee market might also be effective—for both personal travel and for freight transportation including railroad.
Milwaukee’s major airport is also located between downtown Milwaukee and downtown Chicago. At a time when the Chicago area’s air travel capacity is strained, better access to Milwaukee’s Mitchell field could be advantageous.
Other cooperative ventures and ideas have yet to be identified. The absence of organized efforts to do so is a bit puzzling in the Chicago–Milwaukee corridor. In contrast, the advent of the trade agreements between Canada and the U.S. has sparked any number of private and private-public associations to promote natural trade flows across the border within local corridors. As the chart below shows, the progress of employment growth has not been especially robust in either metropolitan area over the past 15 years. Perhaps a little détente along the Illinois-Wisconsin border might be advantageous to all.
December 4, 2006
Chicago Plans for Freight
The Chicago area economy developed on its ability to move freight. With heightened global trade, Chicago area freight transportation has grown rapidly and it is projected to continue to do so, leading to added congestion on highways that are shared by automobile drivers and trucks alike.
This raises important questions as to how the Chicago region should plan future modifications to its transportation infrastructure. The answers are not completely obvious for several reasons. To some degree, Chicago’s economy is shifting toward high-valued service production and away from freight-laden manufacturing. As a result, the value of Chicago’s existing roadways to bring workers to and from their offices is rising in relation to their value for moving goods around and through Chicago. And even with some concerted and likely expensive actions to expand and reconfigure infrastructure, there does not appear to be room for all roadway (and rail) traffic.
Building roadway capacity to serve all possible traffic is not an option. To do so would be too expensive in both construction costs and in taking up limited urban land. Yet, the region will want to act to maximize its ability to handle as much freight (and auto traffic) as possible. And so, in addition to some expansion of transportation capacity, the region will need to determine the most critical infrastructure to repair and build. So too, the region will need to engage in more efficient planning on the location of housing and commercial activity in order to economize on overall travel demand. Finally, more rational operational and pricing policies allocating existing transportation infrastructure will need to be adopted.
Rising global trade has dramatically added to cross-continental freight traffic through Chicago from imported goods landed on the East Coast going west and from the West Coast headed east. Much of this freight activity takes place in Chicago’s large railroad yards and side tracks. Chicago is also a major destination and transfer point for freight carried by truck. Because highway overpasses and underpasses for rail have not been constructed everywhere or they are of insufficient height, auto and truck traffic becomes further congested and delayed.
Adding to local truck-related congestion is the fact that, in order to accommodate rising freight traffic in a cost effective way, goods are now hauled in standardized containers. These containers are often transferred between transportation modes within Chicago, especially by “lifting” containers from truck to train and train to truck. According to World Business Chicago, the Chicago area now ranks among the top five cities in the world in container “lifts” behind Hong Kong and Singapore, where freight lifts mainly take place onto and off of large ocean-going vessels.
The strongest impulse of local policymakers is to find ways to keep transportation flowing through Chicago and possibly build on it as the opportunities arise. By one estimate, rail freight companies and their suppliers employ about 37,000 workers in the Chicago area, while trucking accounts for another 50,000 jobs.
In addition, proximity and low-cost access to delivered goods support income and jobs in related industries. The Chicago region and surrounding Midwest continue to host one of the nation’s largest concentrations of manufacturing establishments, in part due to these transportation advantages for bringing in raw materials and shipping out more-finished products. So too, Chicago remains a major center of wholesale and warehousing operations for its own manufacturing companies and for the greater Midwest region. Even aside from these related industries, as the nation’s third most populous metropolitan area, Chicago needs significant local freight capacity just to supply goods to its own consumers and households. Such freight-carrying ability translates into lower cost of living and greater variety of goods in generally attracting workers and other residents.
Further opportunities for Chicago to handle freight are in the offing. Much global freight now travels through the Panama Canal. Over the next few years, the canal will reach maximum capacity, while its ability to handle large vessels is becoming somewhat obsolete. Although Panama is planning to upgrade the Canal, during the interim the demands on overland inter-continental freight as a possible alternative will rise considerably. Here, Chicago’s history as a railroad town figures prominently, since the nation’s major railroad lines converge in Chicago. Much of the nation’s long-haul railroad freight now travels through the Chicago region, with much of it being transferred from one line to another, or to and from another mode of transportation, especially trucks.
To make headway in accommodating freight, local initiatives have been formed as public–private partnerships. One such partnership is the CREATE rail infrastructure improvement program. The program is a cost-sharing partnership among the Chicago region’s railroads, the City, and the State of Illinois, which will loosen bottlenecks in railroad freight flow through the city.
More comprehensive approaches are also underway to plan for and accommodate more transportation. A new agency (CMAP) has recently been created, consolidating the Chicago area’s existing transportation planning agency with its land use authority. It is anticipated that more careful and coordinated consideration of the region’s land use, housing, and transportation will reduce overall highway travel demand in the region by both cars and trucks. Freight traffic considerations and opportunities are also explicitly on CMAP’s agenda as the agency works to promote collaborative planning in the Chicago region.
From a cost–benefit standpoint, it would be foolish, even it were feasible, to expand infrastructure to meet all possible freight traffic. Land is scarce and expensive in Chicago, which argues against unlimited expansion of land for use in freight transportation. Local benefits of infrastructure expansion may be especially limited for freight that flows through Chicago without off-loading. In these instances, the benefits of Chicago’s freight capacity are more national in scope, or perhaps of benefit to the broader Midwest region. For this reason, projects such as CREATE are requesting that the federal government as well as private freight carriers help finance local infrastructure.
New pricing policies that charge freight users for roads and rail can also help to ration limited roadway capacity and allocate it toward its highest value use. For example, the Illinois State Toll Highway Authority now charges higher fees for driving during peak traffic times on its highways in and around Chicago. At the same time, electronic payment of tolls helps to speed both cars and trucks through toll stations. In looking for further improvements, policy makers in the Chicago region can examine a host of models and experiments from around the world that are pricing highway congestion, often in combination with privatized ownership or operation of transportation infrastructure.
The Chicago region cannot probably accommodate all of the nation’s freight needs in coming years, nor would it want to do so. Still, Chicago’s built legacy of infrastructure affords it opportunities for further growth and development in the freight arena and in spin-off economic development activities. Through thoughtful planning and evaluation, cost-effective operation, and well-structured pricing mechanisms, the Chicago Region can realize a broader scope of development opportunities.
September 13, 2006
Where is automotive employment in the Seventh District?
Perhaps the most notable economic development taking place in the Seventh District is the market shift away from the traditional "Big 3" domestic auto makers--General Motors, Ford, and (Daimler)-Chrysler--and their parts suppliers. Lost sales are shifting toward the "new domestics" such as Toyota and Nissan and their parts suppliers. The sales gainers tend to be located outside of the Midwest to a greater degree than the Big 3. This shift is documented and analyzed in a recent Economic Perspectives article by Thomas Klier and Dan McMillen. This market upheaval is tending to idle and displace workers in many Midwest communities. Per Klier and McMillen, Michigan automotive employment is down almost one-third since 1979 while southern states such as Kentucky, Tennessee, Alabama, and the Carolinas have experienced a tripling of jobs.
But despite these shifts, Detroit and much of the Midwest continues to be the center of the production. Which particular communities remain most sensitive to future swings in automotive fortunes? The data below attribute automotive employment to particular metropolitan areas in the Seventh District. Those metropolitan areas with green shading had an employment concentration in automotive that exceeded the nation; those shaded in red had a lesser concentration. Looking across metropolitan areas in the entire Seventh District region, an east-west split in auto employment concentration becomes very apparent. The Michigan-Indiana corridor contains most of the metropolitan areas having an above-average concentration. Darkly-shaded metropolitan areas in southeast Michigan are exceptionally concentrated in automotive. So too, an east-west band of metropolitan areas across north central Indiana is steeped in automotive employment.
A numerical listing of automotive employment below shows just how concentrated some communities can be. Metropolitan areas including Detroit/Livonia/Deaborn, Flint, Holland, Saginaw, Battle Creek, and Lansing/East Lansing in Michigan all reported concentrations over 5 times the national average, as did the Kokomo and Lafayette metro areas in Indiana.
The final table below further illustrates the sharp geographic rift in employment fortunes over the 1990-2005 period. As a whole, the state of Michigan lost over 64,000 jobs in automotive, on net accounting for all job losses nationally. Largely due to the Michigan experience, the Seventh District states experienced an 18 percent decline in automotive jobs since 1990 while the remainder of the U.S. experienced a 3 percent gain in similar employment.
August 16, 2006
Business services as a growth sector for Great Lakes cities?
As manufacturing activity shrinks and relocates, large cities of the Midwest look to another staple of their economic base, business and professional services. Large cities everywhere typically serve as centers of finance, communication, governance, and varied business services. In the Midwest, business service specializations in cities originally derived from goods production, as surrounding farms and factories looked to cities for financing, advertising, management expertise, product design, legal services, and engineering, as well as computer systems advice, more recently.
In the past few decades, agriculture and manufacturing activity have been shrinking in the Midwest, at least in terms of nominal personal income arising from manufacturing firms. In the overall U.S., for example, personal income derived from manufacturing activity has fallen from 32.9 percent to 15.5 percent from 1969 to 2004. This falloff is especially prominent in large Midwest cities, where manufacturing once thrived due to urban freight transportation advantages and the intense workforce needs of mass production.
Can advanced business services help fill the void in Midwest cities’ economies? There are several reasons to focus attention on these industries. First, there is already a pronounced urban location propensity for business services, so prospects for this sector in large cities are perhaps better than for others; also, in the overall U.S. economy, the business services sector has recently been a growth leader. Finally, many business services employ highly skilled occupations, and they tend to generate high levels of wages and income that may directly and indirectly buoy large city economies.
On the latter point, as formally defined by the North American Industry Classification System (NAICS), the “professional and technical services sector,” NAICS sector 54, tends to employ an above-average share of highly-educated (and highly paid) workers. As described by federal government statistical agencies (Census and BLS), the sector’s industries employ many executive and technical occupations, namely those found in research and development, legal services, management consulting, accounting, advertising, engineering, public relations, and product design.
In the analysis that follows, a focus on the NAICS 54 sector is advantageous because its services are almost exclusively sold to other businesses rather than to households, and many of these services can be sold to customers located far away. In thinking about regional economies, such tradable services may offer a wide scope for possible growth and development. Moreover, data covering employment in the sector are available for geographic regions as small as metropolitan areas.
Rapid growth characterizes the business services sector. The chart below illustrates that as a share of total payroll employment, “professional and technical services” has expanded from 4.2% to 5.3% from 1990 to 2005. The sector’s average annual growth of 3.0% per year easily exceeds that of total payroll job growth (1.3%), adding 2.5 million jobs to the U.S. economy since 1990.
Click to enlarge image.
Business services’ urban orientation can be conveniently described by an index of employment. The concentration index is the ratio of two shares. For the ratio, the numerator is the business services sector’s share of total jobs in a particular region. The denominator is the business services sector’s share of total jobs in the overall U.S. And so, for example, if the sectoral share of total jobs in a particular region is equal to the sectoral share of jobs in the U.S., the index will take on a value of one. To the extent that a region’s share of jobs found in business services exceeds the nation’s, the index takes on a value greater than one, and so on.
Such a concentration index is constructed below for the most populous metropolitan areas in the U.S. The top five metropolitan statistical areas (MSAs)—New York, Los Angeles, Chicago, Washington, D.C., and San Francisco—are, taken as group, more than 50 percent more concentrated in business services jobs than the overall U.S. Moreover, an hierarchy of this concentration by city size is evident as we expand the index to include less populous metropolitan areas. Though still well above parity with the nation, the indexes of the top ten and top 20 most populous metropolitan areas lie below the concentration of the top five most populous metropolitan areas.
Time trends in business services employment also tell us some important economic features. Most prominently, the concentration of business services employment in large urban areas has been falling (i.e., business services jobs have been spreading out toward smaller cities) in the U.S. since 1990. Apparently, the greater ability and lower cost to communicate electronically over time has allowed smaller cities, as well as other nonurban settings, to win out over large, densely populated cities that more easily facilitate face-to-face interactions.
It has been observed that business services employment dipped more than the overall employment during the recessionary periods of the early 1990s and 2000–03. Such cyclical sensitivity to the general economy has long characterized so-called blue-collar and production employment, but its emergence for occupations in business services was somewhat novel during the recession of 1990–91 and its aftermath, when labor market restructuring of mid-level managers and other white-collar occupations took place. In the more recent recessionary period, white-collar employment declines in business services were associated somewhat with the slackening of investment in information equipment and associated services. More generally, many business services may be characterized as “investment goods” by companies, meaning that their purchase tends to slacken during recessionary and subsequent recovery periods, when firms no longer need to expand their own production capacity.
Midwestern metropolitan areas have generally followed these national trends and characteristics of NAICS 54 employment, although there have been some exceptions. For one, as shown below, some of the region’s large metropolitan areas are generally less concentrated in business services as measured against the national employment structure. In part, this follows from the higher manufacturing intensity of Midwest cities; by construction, if a region’s employment base is high in one sector, that concentration must be offset in the others. And so, although Des Moines, Milwaukee, and Indianapolis are centers of business services in relation to the surrounding Midwest areas, their employment base is less concentrated in business services (as narrowly defined) than is the U.S. employment base.
The Chicago and Detroit metropolitan areas register as the most concentrated in business services among large metropolitan areas in the Midwest, with Columbus, Pittsburgh, and Minneapolis–St. Paul also registering concentrations well above the national average.
Owing to its reputation for automotive manufacturing, it will surprise some to find that the Detroit metropolitan area claims the largest concentration in business services. In fact, in this regard, Detroit leads the Chicago area, which is generally renowned as the region’s services and financial capital.
A closer look at the employment structures within the general category of business services raises some interesting and serious questions about the growth prospects of business services for large metropolitan areas in the Midwest. The bar chart below displays the concentration indexes for each detailed business services category, comparing the Detroit MSA with the Chicago MSA.
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Chicago and Detroit specialize in different sectors of business services. The Detroit MSA scored highest for “architectural and engineering services,” while Chicago scores lowest in this category. This specialization’s high score in Detroit reflects the product engineering completed for the automotive industry, much of which is driven by local demand by domestic automakers. However, some of Detroit's business services have evolved to serve global customers as well. Another one of Detroit’s employment concentrations, scientific research and development (R&D), also largely reflects Detroit’s reputation as a global research and design center for the world’s prominent automakers. Toyota, for example, has recently announced a new $150 million R&D facility to be built near Ann Arbor, Michigan.
The Chicago MSA’s most significant specialization is “management and technical consulting.” The Chicago area is the domicile of major offices of world-renowned management consulting firms, including Accenture, Booz Allen Hamilton, McKinsey & Company, and A.T. Kearney. Facilitated by the strong air travel connections at Chicago’s O’Hare International Airport, these firms’ consulting operations are able to serve clients throughout the region, the nation, and the world.
As the Midwest’s historic industry specializations decline in size, especially manufacturing, such business and professional services will be increasingly important in maintaining the region’s size and high household incomes. But to what degree are such industries derivative and dependent on local manufacturing itself? If sales to local firms dominate these sectors, then the prospects are possibly dimmer because productivity gains in goods production continues to shrink the nominal share of income derived from manufacturing and agriculture.
The recent employment performances in business services in Detroit and Chicago offer some clues regarding the degree to which business service firms in the Midwest have expanded their customer base beyond the immediate region. The evidence suggests that business services in these cities do continue to depend on midwestern customer demand in an important way. Midwest employment growth has been lagging significantly since the 2001 recession. At the same time, as the chart below suggests, local employment in the professional and technical services category has also dipped to a greater degree than the national employment, suggesting that the demand for these services derive from local rather than national or global markets. Moreover, further analysis of the employment data suggest that these cities' steeper-than-national-average declines did not result from any unfortunate mix of industry subsectors in Chicago and Detroit. In particular, had Detroit's individual industries under the NAICS 54 category each grown at the national rate from 2001-2004, the larger sector's decline would have totalled only 2.1 percent rather than the actual 7.3 percent decline. And similarly for Chicago, rather than the actual 9.7 percent decline over the period, the NAICS 54 employment decline would have amounted to only .8 percent. And so, though the evidence is not definitive, it appears from this performance that the NAICS 54 sector in Chicago and Detroit continues to serve regional markets to some considerable degree.
Professional and technical services continue to be important national growth sectors that merit a close watch by Midwest economic analysts. Nationally and regionally, these sectors continue to grow as goods producers and other businesses expand their use of such specialized services and as they outsource some business services that were previously conducted in-house. Regionally, given the slower pace of business expansion in the Midwest, the growth prospects for large Midwest cities, such as Detroit and Chicago, would probably be more robust should their business services firms expand their markets throughout the nation and the world.
July 25, 2006
Mid-year jobs report
Looking west from Ohio to Iowa and Minnesota, there is a distinct falloff in economic growth, at least according to recent reports on payroll employoment. With only a three-week lag, the Bureau of Labor Statistics reports their estimates of payroll employment monthly for individual states. The reported monthly figures for June 2006, now complete the second quarter of this year.
The table below displays year-over-year payroll job growth in the seven Midwest states and the U.S. Note that job growth in all states except Iowa and Minnesota fell short of the U.S. growth of 1.4 percent.
One reason that explains lagging job growth in many Midwest states is their heavy concentration in manufacturing industries. As the Chicago Fed’s Midwest Manufacturing Index suggests, real output growth in manufacturing has been growing strongly now for 3 years in both the nation and in the Midwest. In general, U.S. manufacturing growth has been buoyed by strong domestic demand for capital investment goods and by growth in U.S. exports. Some notable (and growing) Midwest capital goods sectors are mining and construction machinery, farm machinery and equipment, heavy trucks, and electrical equipment. However, strong output growth in manufacturing does not typically propel much payroll job growth because real output gains are generally being achieved through higher productivity rather than through more labor input.
With respect to total payroll employment, the three easternmost states of Ohio, Indiana, and Michigan show the weakest year-over-year growth. Further to the west, job growth in Illinois and Wisconsin have been stronger, with still stronger growth for Iowa and Minnesota.
For some states, such as Illinois, recent payroll job growth is especially encouraging since growth had been lagging since the last recession. Along with Indiana, Michigan, and Ohio, Illinois employment has not yet re-attained its previous peak which occurred in the year 2000.
Illinois' job gains are being led by growth in professional and business service industries even while manufacturing employment has been declining. The Chicago-area economy, which comprises the bulk of Illinois, has been shifting into business and financial services while moving away from manufacturing. Chicago’s business and financial services depend on customers in surrounding manufacturing-intensive states but they also serve some global and national markets.
At the other end of the spectrum, Michigan’s recent job performance remains very much in a league of its own, even when compared to other Midwest states. The chart below indexes total payroll jobs to the first quarter of 2001. While the rest of the region has almost re-attained its former employment peak, Michigan employment remains 6 percent to 7 percent below its previous peak.
The troubles of domestic automakers Ford and GM, and their automotive parts suppliers, have been weighing down growth in Michigan. Since the year 2000, their combined share of U.S. light vehicle sales has declined from 51.1 percent to an average 41.3 percent year-to-date in 2006.
These companies are highly concentrated in Michigan. In addition to their global headquarters and many research facilities and part suppliers, for example, Ford and General Motors together maintain 12 of their 34 U.S. assembly plants (35%) in Michigan. For this reason, Michigan residents are closely following the strategic plans of these companies as they attempt to restore growth and profitability.
July 6, 2006
Manufacturing exit tough on Midwest central cities
If current trends continue, manufacturing activity will soon become extinct as a part of central city economies. The reasons for this exodus are largely the result of shifts in the technology of many types of production activity. Central cities—especially in the Midwest and Northeast—are generally densely populated and somewhat congested. Such conditions are not ideal for production activity. Many central cities vigorously attempt public policies to preserve manufacturing jobs, but the opposing forces appear to be very strong.
At one time, many central cities were the preferred locale for manufacturers. The reasons can be boiled down to two, transportation of laborers and transportation of materials.
As for labor, factories were once teeming with laborers. But due to labor-saving productivity gains, today’s factories are sparsely populated even though they produce many times more output. Senior Business Economist Bill Strauss calculates that today it takes 200 U.S. manufacturing workers to produce the same amount of product as 1,000 workers in 1950. Accordingly, during those earlier labor-intensive times, the transportation of manufacturing workers to the job site figured much more heavily into the factory cost equation. Transportation efficiency once was served by factory neighborhoods in central cities where workers could more easily commute by walking, driving, or by public transportation. The higher living density of central cities also meant that public services such as education and sanitation could be delivered cheaply to workers. Of course, it is not only manufacturing technology that changed. Better highways and rising standards of living (translated into higher car ownership) have also contributed to the ability of factories to staff their factories with (fewer) workers who live farther away. In turn, this opens up factory sites in suburban and rural areas.
Better highways, road vehicles, and logistics technology have also made the transportation of production material to central cities less attractive in comparison to areas of lower population density. Economically, railroads once dominated long-haul truck transportation of materials and components used in manufacturing, as well as the shipment of finished goods to other final markets. The technology of rail favors convergence into a central location (i.e., central cities) rather than the dispersed locations that are served by the crisscross pattern of our now ubiquitous highways. Over time, construction of divided highways and the advent of trucks having features such as refrigeration, trailers, and easily transferred containers have facilitated factory sites served by roads rather than by rail. Accordingly, factory sites can now better take advantage of the low land costs of rural and suburban areas rather than being restricted to those of the central cities.
The City of Chicago exemplifies the central city experience with manufacturing jobs. The chart below shows that, by one reckoning, manufacturing jobs in the city have declined from 367,000 in 1976 to under 100,000 today—a loss of approximately 10,000 per year. In contrast, the employment experience of Chicago’s suburban areas has been much milder.
The experiences of other central cities has been somewhat similar to Chicago’s, even some of those cities located in the faster-growing Sunbelt regions. The table below, drawing on data from the Census of Manufactures, describes the manufacturing job changes from 1977–2002 of the 10 most populous U.S. cities (as of 1980). Over the period, manufacturing jobs in these 10 cities dropped by 62%, which is more than double the pace of manufacturing job loss in the overall U.S. Although the job gains of San Diego and the slight loss by Phoenix seem to be exceptions, they are not. Rather, their experience reflects the fact that the land area of those cities has expanded by 2.5 times and 4 times, respectively, through annexation since 1980. At the same time, Midwest city boundaries have remained essentially fixed.
So too, as shown by the table below, the city of Chicago’s experiences are mirrored closely by the central cities of the industrial Midwest. The high population density of places such as central city Milwaukee and Cleveland came about during a different era than the more recent growth of low-density (and expanding) cities of the West and Southwest.
Many central cities of the Midwest owe their original existence to manufacturing, so the steep loss of manufacturing jobs in central cities has typically been painful. In response, these cities often attempt to combat manufacturing decline through public policies. For example, some policy initiatives to make manufacturing activity more competitive in cities include clearing land, cleaning up environmental hazards, preserving or setting aside land exclusively for manufacturing purposes, or easing freight transportation congestion. However, so far, the allure of suburban and ex-urban manufacturing locales has been too strong to overcome.
June 26, 2006
Chicago companies.....a changing town?
Lately, the Chicago business press has lamented the region’s loss of large company headquarters—for example, those of Amoco, Arthur Andersen, Borg-Warner, Quaker, Searle, and Zenith. The chart below numerically depicts the source of this local concern: The Chicago area is down 19 headquarters over the period from 1975 to 2005 as measured by Fortune magazine’s list of the largest nonfinancial companies. Has Chicago lost its vitality for building large companies and hosting their headquarters?
Taking a broader perspective, it appears that Chicago has held its own as a domicile for corporate headquarters. It consistently ranks second place among large metropolitan areas that host headquarters; only New York exceeds it. Looking farther afield, one can see that headquarters offices of the largest companies have spread out to other metropolises that have come into their own as business centers. A recent conference examined shifts in headquarters site decisions and motivation. Cities such as Houston, Atlanta, and San Francisco have developed a large scope of business support services, such as legal, accounting, and management consulting, that attract headquarters. All have large hub airports which are desirable in sending out and bringing in headquarters execs and their business associates.
In some ways, then, Chicago’s relative loss of headquarters reflects the filling in and development of the remainder of the U.S. rather than Chicago’s decline. To put it another way, why would we expect Chicago and New York to maintain the lion’s share of headquarters while the remainder of the U.S. economy grew more rapidly?
A different look reveals that Chicago’s headquarters companies have grown at a healthy rate—one that reflects a mature but healthy business service center. The following tables list the Chicago region’s top 50 companies from 1979 to 2005, again measured by Fortune magazine’s accounting of total company revenues. The companies’ revenues are quoted in comparable dollars, equivalent to spending power for gross domestic product (GDP) in 2005.
In examining individual companies among these rankings, we can see that, on average, the annual revenues of the top 50 companies in 2005 exceed those of the equivalently ranked companies in1979. In fact, the sum of the top 25 companies’ revenues in 2005 exceeded that of their counterparts’ in 1979 by 89 percent. For the top 50 companies, the revenue total of 2005 companies exceeded that of 1979 companies by 78 percent. Over this time period, the overall U.S. economy grew by 115 percent. Accordingly, in the context of the faster regional growth taking place in the Sun Belt and the West since 1979, Chicago has enjoyed healthy, though modestly lagging, success as the domicile of many of America’s largest and fast-growing companies.
In explaining Chicago’s continued role as a headquarters city, we can see that many large companies have survived and prospered from the 1979 list. These companies include Brunswick, Caterpillar, Deere, Kraft, Sears, United Airlines (UAL), and USG (United States Gypsum). Still others—such as Walgreen’s, Abbott, McDonalds, Archer Daniels Midland, and Illinois Tool Works—have survived and even experienced outsized growth. Walgreen’s revenues are up over 13 times since 1979. Illinois Tool Works Inc. ranked 17th in 2005, with $11.7 billion in revenue, although the company had not made the top 50 list of 1979.
Other companies have chosen Chicago as their headquarters’ domicile from outright relocations, during mergers, or through spinoffs. Boeing is the most notable relocation, choosing Chicago in 2000 over competitors Dallas and Denver. OfficeMax Inc. is another relocation to Chicago (from Boise, Idaho). Smurfit-Stone chose Chicago during its merger, and medical equipment maker Hospira Inc. was a recent spinoff of Abbott.
Other promising companies with headquarters in the Chicago region, such as Hewitt Inc., a human resource management company, have grown up here and have since emerged as public companies. Equity Office Properties Trust is another home-grown company with headquarters in the area, as is CDW, a computing equipment leasing company.
A comparison of the top 50 lists also reflects the shifting industry orientation of the Midwest away from manufacturing to services. In 1979, 33 of the top 50 companies could be classified as manufacturing versus 26 in 2005.
The Chicago region correctly stands up and takes notice at the loss of a large company headquarters. Hosting companies’ headquarters is an important specialization of Chicago’s economy. Over the long term, Chicago’s headquarters’ performance is a cause for interested concern though perhaps not for alarm.
May 30, 2006
Hog Butchers No Longer?
In his description of Chicago, Carl Sandburg poetically referred to it as the “city of the big shoulders … stacker of wheat … tool maker … player with the railroads … hog butcher.” At the time, this description fit Chicago’s economy just right as a place of muscular blue-collar industries such as rail freight, steel making, and meat packing. But today, Chicago’s economy has morphed into a city of more genteel, white-collar professions and industries. Infrastructure, such as a global airport and a significant broadband communications capacity, have helped to develop industries that are knowledge-based rather than commodity-based.
The chart below compares the Chicago metropolitan area’s employment with the nation’s across broad industry sectors. The bars measure the share of total employment in a given industry so that, for example, the top maroon bar illustrates that 14 percent of U.S. employment can be found in government sectors, while 11 percent of the Chicago area employment can be found in government sectors (purple bar).
The purple bar that illustrates Chicago’s long suit is “professional services.” Most of these industries are business services, including accounting, management consulting, advertising, temporary services, legal, and research and development. To a large degree, these industries are staffed by educated professionals. In comparison to the overall nation (maroon bar), Chicago’s economy is more highly concentrated in these industries. The same can be said for the finance, insurance, and real estate (FIRE) sector comparison that can be found below professional services on the chart. The FIRE group includes Chicago’s world-leading risk exchanges and related businesses.
To staff its new economy, many young and educated workers are migrating to Chicago, especially from surrounding states. In addition to career opportunities, they are attracted by amenities such as lakefront parks, renovated neighborhoods, lively nightlife, operas, ballet, and orchestras. In a recent news article, journalist David Greising playfully rewrote Sandburg’s poetic ode to Chicago to reflect its new economy: “Hog belly trader for the World, Writ Writer, Consultee of Companies, Builder of Airports, and the Nation’s Intermodal Carrier, Prideful, Anxious, Hopeful, City of the Stringed Orchestra.”
The service orientation of Chicago’s economy has come about in a remarkably short time. It was not so long ago that Chicago’s employment concentration closely resembled the surrounding Midwest economy, especially its sharp concentration in manufacturing employment. The chart below tracks the manufacturing share of Chicago’s economy from 1969 onward and compares it to the overall U.S. As recently as 1969, both Chicago and the surrounding Midwest were significantly more concentrated in manufacturing jobs than the U.S. But steadily over time, Chicago’s concentration has converged with the U.S., while the Midwest as a whole has maintained a higher proportion of jobs in manufacturing.
What does Chicago’s divergence from the Midwest mean for its economic performance and prospects? For one, it means that Chicago may maintain a healthy pace of population and income growth although it is shedding manufacturing jobs at a rapid clip. In comparison, other Great Lakes manufacturing cities such as Buffalo, Cleveland, Detroit, and Milwaukee have not been as successful in replacing lost manufacturing jobs with high-end services.
But this performance does not necessarily mean that the Chicago region has cut loose its ties to the surrounding Midwest economy. During the 1990s, many observers hailed Chicago’s strong economic performance as an indication of its arrival as a global city rather than as a midwestern city, a city with strong trading linkages beyond the immediate region. However, over the past 5 years, Chicago’s employment growth has slipped to a tepid pace of approximately one-half the nation’s, which is much like the pace of the overall Midwest. Even the performance of its business service sector has been lagging. Could it be that Chicago’s service sectors continue to sell to surrounding Midwest businesses such as agriculture and manufacturing rather than to the nation and the world?
The answer to this question is important in assessing Chicago’s growth prospects. The answer is far from crystal clear. In part, Chicago remains and will remain the commercial center of the surrounding Midwest for many years to come. And so, the sagging fortunes of Michigan's automotive companies to Chicago’s east will likely be felt in the capital markets and consulting offices of Chicago. However, it is also the case that many Chicago business activities are now broadening out farther afield to global markets. For example, Chicago’s risk exchanges and its world-class universities are aggressively extending business lines and services to Asia.
So too, the recent slowing in Chicago’s economic performance may reflect some special developments that are not likely to be repeated. In particular, business travel is a key service activity of Chicago’s economy that was stiffly impacted by the national business slowdown in 2001-2004 and especially by the 9-11 air travel slowdown. At the same time, the national post-Y2K decline in computer and computer-system investment likely impacted business consulting companies in Chicago as well.
More generally, many business and professional services are purchased for the same reasons and with the same timing as capital investment. That is, as the capacity of firms begin to be stretched thin during times of ongoing economic expansion, firms once again purchase business services and capital equipment alike in order to expand production capacity and to find and serve expanding markets. In turn, the strong business investment that has been taking place in the U.S. economy should continue to be felt in the office buildings of the Chicago economy.
May 23, 2006
Connecting to achieve tech commercialization
Several cities and metropolitan areas in the Midwest are actively encouraging startup technology companies. Not all of these cities are likely to succeed, but those that have a prodigious base of basic research activity have the best prospects. The Chicago metropolitan area has long been one place where the strong flow of both federally-funded and large-company R&D in the medical and life sciences suggests that there could be greater potential for technology startups as well.
A number of recent efforts in the Chicago region are specifically focussed on technology startups. These efforts include new technology parks, cooperative university R&D consortia, new venture funds, and entrepreneurial assistance. On May 15, technology leaders gathered at the Federal Reserve Bank to discuss the formation of a Chicago-based network that might better link and connect technology commercialization efforts to like-minded organizations in the metropolitan area. Places such as San Diego and Cambridge, England, are notable locations where such connecting organizations are reputed to have stimulated growth in technology startup companies. What can the Chicago area learn and adapt from such models?
The program began with the observations of a technology founder and business builder in both Seattle and in Chicago. Wilbur H. (Bill) Gantz, Chairman of the Board of Ovation Pharmaceuticals, Inc., in Deerfield, Illinois, emphasized how very difficult it is to successfully bring a new company to market. Raising funds is very difficult, but building a company with a profitable product is even tougher. As a result, life-sciences startups “can never get enough support.”
Life-science startups in the pharmaceuticals arena go through many distinct phases, each with unique support needs. University scientists may be needed early on. And in following stages, competent partners must be close at hand to assist with financing and protection of intellectual property. At later stages, product development, marketing, and manufacturing expertise may be crucial.
In Gantz’s Seattle startup, PathoGenesis Corporation, the University of Washington was a helpful partner in sharing university faculty in research and development. Local financing was also key to the startup there. However, the Seattle location presented challenges in local availability of pharmaceutical chemists. For that reason, such personnel were recruited from the Midwest and East Coast, and product marketing expertise needed to be outsourced to the Chicago area.
Gantz further emphasized that Chicago tends to be very strong in such basic business services as marketing, public relations, and intellectual property. Moreover, the metro area is rich in technical personnel that can be hired as necessary from the large life sciences companies Baxter and Abbott and local universities, or else recruited back to Chicago from former Searle employees who left the area when their facilities closed. Despite access to such personnel, recruitment of cutting-edge university scientists is more difficult; Chicago’s university scientists tend to be more adverse to risk and to commercial ventures than those in Seattle.
Nonetheless, Gantz sees the Chicago environment as strong and getting stronger. The real estate end has been expanding with the establishment of a research park at the Illinois Institute of Technology as well as one at the former Searle facility, along with expansion of the Chicago Technology Park. So too, Chicago’s early stage capital scene is now brighter as so-called angel investor networks are forming. Government support of an appropriate nature has also come around, as evidenced by the city’s competent hosting of the nation’s premier business conference in the life sciences, BIO2006.
The next conference speaker was Stuart Henderson, Partner and Biotechnology Practice Leader for Europe at Deloitte, UK, who offered his insight and experiences with Cambridge’s connecting organization, Cambridge Network. The initial conditions in the Cambridge area were not so different from Chicago, prodigious university research but comparatively less commercialization. Also similar to Chicago, there was no “burning platform” of general economic demise in the Cambridge area 20 years ago, but simply unfulfilled economic potential. Yet today, Henderson claims that there are 1,500 technology companies in a town of 200,000 people (though perhaps 6.5 million people reside in its labor market area), including global companies such as BP-Amoco, Schlumberger, 3M, Amgen, and Pfizer.
Henderson reported that a well-conceived organization called Cambridge Network was key to bringing about this success. The network was founded by a small group of highly passionate and committed leaders who put up only modest funding at the outset. He described it as “a simple meeting of minds.”
Henderson further described the Cambridge Network as serving as a window to the world into Cambridge technology capabilities and activity—a vehicle to showcase the Cambridge brand. Most importantly, the Network’s organization built a community of many other organizations who came to share information and to cooperate. The Network’s success depended on listening carefully to their members’ needs and responding quickly with appropriate services. These services included directories of who was who in technology, a continually-updated virtual (online) press room, training materials, benchmarking surveys of progress, open meetings, formation of special interest groups, and events to bring new and younger members into the mainstream.
Henderson cautioned on the pitfalls into which their organization sometimes stumbled along the way. His suggestions included being ruthless in keeping non-contributing government officials and other “hangers-on” away from discussions and events, along with entrepreneurs who had been “one-hit wonders” who monopolized discussions with poor advice for others. As always, the leadership of the network also needed to be constantly vigilant against turf-fighting behavior among membership organizations while promoting partnership and consensus instead.
San Diego’s over-arching organization, called CONNECT, is highly renowned as a prototype to facilitate interchange among technology interests leading to commercialization of technology. Unlike Cambridge’s motivation to build on untapped potential, the original impetus for San Diego’s actions was a rapidly-sagging economy in the mid-1980s that was impacted by the Savings & Loan crisis, military base closings, and reductions in national defense spending.
According to CONNECT's CEO, Duane Roth, CONNECT’s purpose is to facilitate the spawning of commercial enterprises from the region’s R&D base. Over the past 20 years, the region has experienced 1,000 company startups, a rate of about one per week. The public and quasi-public research base is now comprised of over 40 institutes and centers including Scripps Research Institute, Salk Institute, and the University of California, San Diego. Both major institutes and many companies are located close to each other in the San Diego area which Roth considers an important precondition for the continuous inter-personal communication and collaboration that ultimately gives rise to innovation and new ventures.
Duane Roth characterized the collaborative culture that has been achieved in San Diego by describing how local entrepreneurs first market themselves to visitors. Unlike most other places in which a company director will begin touting their own enterprise to visitors, Roth claims that San Diego companies will instead begin touting the San Diego cluster and working environment.
As a former Iowan, Roth also made a clear cultural distinction between the Midwest and the West Coast. Midwesterners are, on average, less likely to take the risks that lead to new enterprises. The reason is that, in places such as San Diego, failure is not a cause for personal condemnation, and so, entrepreneurs are willing to just try again after failure. To a greater extent, at least in Roth’s experience in Midwest agriculture, the fear of failure and the resulting shunning by the community tends to create a culture where people are afraid to take risks in the first place. In order to build and nurture a risk-taking culture, the community must also support entrepreneurs of well-crafted failures in the aftermath.
Roth also mused that, because changing an existing culture is so very difficult, it may be easier in the Midwest to “start a new one.” By this he meant that entrepreneurship should especially be pitched to the young and, more generally, to as many willing listeners as possible in order to generate the critical mass of people that are necessary.
In addition to the celebratory and risk-taking culture in San Diego, some of the key processes that give rise to new companies and enterprises are rigorous and intense. Of these, a “springboard” program sets up panels of critics before which would-be entrepreneurs vet their business plans in two-hour sessions. Review panels are comprised of volunteer “entrepreneurs in residence” along with financial company reps, professors, angel investors, and business professionals. To prepare for such rigorous reviews, CONNECT offers many short and intense educational programs on starting and building a successful technology enterprise.
Despite its success, San Diego’s technology industry currently faces challenges if it is to sustain its growth. In particular, work force availability is tight and high housing costs limit the recruitment of new personnel to the area. Industrial land for later stage operations, including manufacturing, is also very tight and restrictive.
Partly for these reasons, Roth foresees a deconcentration of technology activity to other regions of the U.S. Perhaps places such as Chicago, Indianapolis, and St. Louis, can most easily enter the small company technology arena by specializing in those business stages such as marketing, scale-up development, clinical testing, or manufacturing where they currently have an advantage, and then possibly expand from there to other (more innovative) niches.
In any event, the successful experiences of San Diego and Cambridge have given interested Chicagoans much to consider as they build a CONNECT-type organization. Existing features that have been successful elsewhere, and those that have flopped, offer many practical clues. However, adaptations will be necessary because some features are different in the Midwest, such as a more spread-out geography of existing technology activity. Still, the basic and most important precondition of a large R&D base would appear to be here already, in addition to the region’s added strengths in business services, transportation, and manufacturing.
Can these strengths be successfully connected and appropriately commercialized?
May 5, 2006
Immigration and Chicago's Growth
In preparing for a presentation to be delivered before the ARS National Forum on Regional Stewardship this week, I was prepared to expound on the superior economic performance of Chicago in comparison to neighboring cities. After all, John Grimond’s recent review of Chicago for Economist magazine recently stated that “Chicago has come through deindustrialization looking shiny and confident.” I must admit that I, too, often characterize Chicago’s performance as robust, and I have observed that both Chicagoans and other Midwesterners believe this to be the case. Much to my surprise, however, in examining total payroll employment trends, I discovered that Chicago’s growth fell short of the neighboring East North Central (U.S. Census division) states region during the 1990s and since that time as well! And in comparison to the nation, Chicago’s per capita income has been flat to slightly declining. What gives?
I believe that part of the answer can be explained by the robust influx of immigrants to the Chicago area, along with the high birth rates of recent immigrants, which have made for a more complex story than the payroll employment and income trends suggest.
Owing to immigration, the Chicago area’s population growth has exceeded the surrounding region since the 1990s, as the chart below suggests. The Chicago metro area is now ranked fifth nationally in proportion of foreign-born population, adding 537,000 between 1990 and 2000—an expansion by over one-half. As of the 2000 U.S. Census, 17.5% of Chicago’s population were foreign born, many of them young families with children. And so, the rapid expansion of the region’s housing stock, revitalization of many older neighborhoods, and home appreciation have not been simply the figments of imagination or the heady boosterism by residents and observers of the Chicago region.
The growing immigrant composition of Chicago's work force, and the way we measure it, may also explain part of its tepid payroll employment growth. Owing partly to language barriers, immigrants are more likely to be self-employed rather than work for a firm as a "payroll" employee. So too, to some extent, immigrant payroll employment may also tend to be casual or uncounted by government payroll employment surveys. An alternative way to estimate employment is conducted by the U.S. Bureau of Economic Analysis (BEA) which takes some account of self-employed workers. In contrast to payroll employment, trends using BEA data (below) suggest that the Chicago area’s employment growth exceeded the East North Central states of Ohio, Indiana, Michigan, Illinois, and Wisconsin in the early years of this decade, and its performance during the 1990s also converges somewhat with the national average.
A moment’s reflection on the measurement of per capita income may also shed light on Chicago’s seeming lack of per capita income expansion during this period. Immigrant groups vary greatly by educational attainment. A recent paper prepared by Sapna Gupta prepared for Chicago Metropolis 2020 reports that almost two-thirds of working age adult immigrants to Chicago from India have college degrees versus only 3% to 4% of Mexican immigrants. Yet, Mexicans are the dominant immigrant group to Chicago in recent years. Accordingly, since education increasingly determines wage and salary income in our economy, Chicago’s immigrant influx has tended to pull down average income. Of course, immigrant household income, even of the least educated, is likely much higher for them than it would be had they remained in their home country. Accordingly, the attendant diminishment of average per capita income in Chicago does not really reflect falling standards of living of Chicago residents.
So, too, as illustrated below, the age of Chicago’s immigrant households, especially Hispanics, is much younger than the pre-existing population. This will also tend to diminish per capita income, since immigrant households will tend to have many more members who are too young to be earning income. Figures reported by the U.S. Census do show that the share of the Chicago area’s population younger than 25 years of age is greater than the U.S. for the year 2000. This gap between the area and the nation has widened since 1990. In contrast, the surrounding East North Central region reports an older population share than the nation, a gap which developed during the 1990s.
The Chicago area has become a different place in many respects over the past 20 years as the foreign-born population has expanded. Not everyone has benefited economically from change, but it is quite likely that, on average, Chicago area households have experienced climbing economic well-being. So, too, Chicago’s economic growth has likely exceeded what it otherwise would have been in the absence of immigration.
While the nation currently debates immigration and southern border reform in the U.S. Congress, Chicago’s primary challenges are of a different order. Many recent immigrants face the typical historic barriers to financial and economic assimilation into the Chicago mainstream: lower beginning levels of income, lesser work force skills, lesser knowledge of customs and procedures, and lower education and school readiness. At a time when much of the Midwest region’s existing population is shifting to Sun Belt locales, many foreign born continue to see opportunity here. To bolster the Chicago economy’s prospects, what actions can Chicago pursue to make the most of these immigrants’ energy, ambitions, ties to their countries of origin, and differing skills and culture?
One arena in which the Chicago area and other immigrant centers has been quite active is in facilitating immigrant access to financial channels. On May 4, the Federal Reserve Bank of Chicago and Brookings Institution issued a major study on enhancing the ability of the foreign born to access financial institutions for savings, wealth building and homeownership, payments transactions, and business creation. The study documents the state and progress of immigrant financial practices and access in the United States, along with many lessons learned from diverse perspectives.
March 20, 2006
Chicago is arguably one of the most-studied places in the world. The origins of this examination likely began with the world’s interest in Chicago’s rapid growth following the Great Fire over 100 years ago, and the subsequent phoenix-like re-birth. Serious sociological study of neighborhoods began with Jane Addams’ documentation of immigrant enclaves here and with the venturing of the University of Chicago’s social scientists outward from Hyde Park. This tradition continues today by social scientists, political scientists, and economists of every stripe. At least two periodic conferences that I know of examine Chicago. Some one-time Chicago self-examinations coming up this year are in celebration of the 97th anniversary of the publication of the great Burnham Plan of Chicago.
And so, any journalist setting out to survey Chicago’s position and prospects is favored in having many people to interview and much source material to draw on. The downside is that, in drawing conclusions and implications, there are also many experts peering over the journalist’s shoulder prepared with well-informed critique. Such a journalist, then, will either be highly accomplished, or else should have a great store of hubris.
Journalist Johnny Grimond of The Economist has just written the first survey of Chicago and its surrounding area for that well-respected magazine since 1980. For the most part, the survey article is about all that could be hoped for by the denizens and students of Chicago. In some respects, it is a love letter to Chicagoans. The prism of comparison of Chicago today to the Chicago of 1980 reveals a city that has moved on from economic despair and survived a period of profound economic restructuring and political turmoil. In this perspective, its achievements are remarkable. Unlike other industrial belt cities, Chicago has survived the greater region’s manufacturing decline and replaced it with high-level service functions and urban livability. Moreover, in doing so, much of its success has emanated from a revived central core outward, rather than becoming solely a suburban ring economy.
Rather than further re-hash the survey article’s findings, I suggest you have a look at it and perhaps contribute your opinions about it here. In my opinion, it will be shame if The Economist’s survey does not provoke a broader dialog among Chicagoans about the future and what, if anything, to do about it. What do you think are Grimond’s errors of commission and omission in assessing Chicagoland and its prospects? Is Chicago poised for prosperity, or has it merely experienced a short-lived respite from long-term decline?
At the end, Johnny Grimond notes a few possibilities for further success, namely further development of its professional services sectors and better commercialization of its educational and technological assets. However, Grimond is somewhat pessimistic in observing that the Daley era may be coming to an end, with nastier politics ahead and no evident leadership handoff in sight. And like its counterparts, Chicago has not cracked the puzzle of easing inner-city poverty and upward mobility. And so, he concludes that “Chicago’s current success may be about as good as it gets.… Chicago, like almost all America’s older cities, still faces the prospect of decline, or at best stasis, unless it can find the elixir of urban life—how to grow richer without growing bigger.”
What do you think?
March 14, 2006
Global Chicago: Da Bulls, Da Bears, Diversity
Chicago United is a 38-year old group devoted to “Enriching the economic fabric of the Chicago region by building sustainable diversity in business leadership.” On March 10, I participated as a panelist at the first of a three-part series titled “Chicago: A Global City, A Global Perspective on Diversity.” Together with my co-panelists Paul O’Connor and Saskia Sassen, we addressed whether Chicago had become a global city and, more importantly to the Chicago United audience, whether Chicago was working effectively from the standpoint of diversity as a business imperative in the global marketplace.
Here are my thoughts, though I’d like to hear yours as well!
The Chicago metropolitan area (Chicago) lies on the razor’s edge with respect to its future. So-called globalization lies at the heart of what has brought Chicago to its critical crossroads. To put it simply, depending on both its own actions and on the fates, Chicago can possibly become a backwater business capital city of a shrinking and largely unimportant region of the United States. Alternatively, Chicago can become an independent city of global importance, a city that attracts the world’s most talent business makers, artists, policy makers, and idea-creators. As such, Chicago could even become the portal that helps revive a surrounding Midwest region which is sorely in need of revival and re-invention.
Globalization means that the world’s economy has become more integrated and intertwined, and its regions more subject to frequent and profound shifts and changes. This is so because communication costs and transportation costs have fallen dramatically. For example, costs of shipping a ton of cargo dropped by three-fold from 1920 to 1960, and containerization and transport by larger and larger ocean-going ships continue to pressure prices downward today. Air shipping costs have dropped by 80% since the mid-1950s. And while many of us complain about airline deregulation and recent security procedures, personal air travel is now much more affordable to average Americans.
Communications cost declines are even more dramatic. The cost of a three-minute phone call from New York to London was once the equivalent of $350 in 1930 in today’s terms. These same communications facilitate both cargo and personal logistics, as well as propelling traded services, information, and capital around the world.
On top of this, most of the world’s nations have agreed to lower barriers to the flow of goods, capital, intellectual property, and sometimes travel and immigration.
How has globalization impacted Chicago? The pressures and challenges are great. Chicago can be characterized as the business capital city of a shrinking economic region. Chicago was borne of the gathering of farm products and natural resources, the sorting and shipping of these products, the financing of these products, and the supply of business and legal services to farms and agri-businesses throughout the Midwest.
In parallel, Chicago became a great manufacturing city as result of its transportation/hauling capability and facilities. Chicago gathered Midwest resources and transformed them more productively than any place on earth. So did other Midwest cities, but Chicago also became the business capital of these lesser cities in supplying them business, financial, and legal services.
Without belaboring the point, these same activities are today shrinking as sources of household income and jobs for both Chicago and its surrounding Midwest. For the most part, technical progress has diminished the need for workers here in Chicago in these activities, even while the attendant productivity gains have raised standards of living both here and around the nation. Growing world trade and import competition have contributed to local pressures and shrinkage. Prices for commodities and routine manufactured goods have declined, too, as both farming and manufacturing have become hugely productive—victims of their own success. And so, income and job growth generated from these activities are now weaker.
Does Chicago have a bright future? Its future likely rests with its ability to grow and develop linkages beyond its immediate region. It must produce services—high valued and sophisticated services-- that are valued in markets far from the Midwest. In the process, it can possibly lead the surrounding region to new markets as well. This is Chicago’s vision of becoming a successful global city.
In re-inventing itself as a global city, Chicago must attract (and also grow locally) the world’s business makers and highly skilled occupations and entrepreneurs.
Thankfully, super large cities such as Chicago are favored in recruiting skilled workers and entrepreneurs, and developing them locally. That is because learning and the networking necessary for career advancment is more attractive in places with many and diverse skilled work force activities. So too, the U.S. work force has become more composed of two-earner families, mostly due to rising labor force participation of women over the past 35 years. Because large cities such as Chicago offer large and diverse work force opportunities, employers can more easily attract highly skilled and specialized workers. Urban amenities are also attractive to many highly skilled or educated workers, perhaps blunting the pull of warmer climates elsewhere.
Within the Midwest, Chicago and the Twin cities are the magnets for highly skilled young workers, ranking 11th and 5th respectively among U.S. metropolitan areas in the proportion of its population aged 25-34 having college degrees.
Chicago also continues to attract immigrant population. Arguably, the single most important indicator of a region’s future and prospects for success is whether people are “voting with their feet” in choosing it as a place of promise. Within the Midwest, thanks to ongoing in-migration of Hispanic, Asian, East European, and other peoples, Chicago’s 17 percent foreign born population far outdistances other Midwest metro areas in its proportion of foreign born. These are people who bring new ideas and new ambitions to the Chicago area.
What signs are there Chicago’s industry base is well-poised for the emerging global economy? Chicago’s economy can look at several promising aspects. Business and legal services were the growth engines of Chicago’s economy in the 1980s and 1990s, outdistancing the growth of such jobs in every other U.S. metropolitan area. Management consulting, accounting, public relations, and the like represent services that Chicago is now selling around the nation and the world. The combined number of jobs in finance, legal, and business services in Chicago surpassed those in manufacturing by the early 1990s.
So too, Chicago’s financial exchanges have shaken off their competitors in many regards along with their institutional sclerosis. They are once again healthy and growing, seeking global partners and markets.
Chicago’s world class universities can count among them the leading business, medical, and professional schools.
In bringing in customers for these businesses, and in sending out its agents, Chicago’s O’Hare airport has been a critical vehicle, replacing what the rail hub once was to Chicago. The early innovation of McCormick Place (and later expansions to it) has made the region a global meeting place for business, commerce, and culture. Rising tourism has followed from around the nation and the world.
But, what must Chicago do if it is to continue to re-invent itself for a global economy? Among other things, Chicago cannot attract the world’s most ambitious and talented people, it cannot grow the world’s innovative and globally expansive businesses, unless it works well on the inside. Part of this working well as a city requires key infrastructure such as highways and land use planning that allows circulation of people in getting around, as well as providing public services and goods to Chicago’s residents. Metropolis2020 and other efforts and trying to lead Chicago into successful resolution of these challenges. It also involves creating the type of amenities that are world class, such as Millennium Park and Lakefront park improvements.
But perhaps more importantly, Chicago must be recognized as an oasis of opportunity for persons of every color, culture, and sex to realize their dreams and ambitions. Otherwise, business builders such as John Johnson and Oprah Winfrey will emerge elsewhere. The new generation of idea makers such as those who were pre-cursors of Genetech and Netscape will continue to move elsewhere, as will the rising stars of sports and culture such as Daniel Barenboim and Donald Young.
How can we nurture a culture of openness and opportunity here? Recognizing and understanding the threats and opportunities are half the battle. Organizational initiatives such as those of Chicago United are helpful.
We might also do well to focus on our opportunities rather than on our problems. As President Eisenhower has been quoted as saying, “If a problem cannot be solved, enlarge it.” In this instance, it is perhaps easier for us to join together when we are all going forward, when we are growing economically, intellectually, and spiritually. Accordingly, ambitious economic growth agendas and initiatives for Chicago going forward should be considered.
At the same time, as we participate in Chicago’s life and economic growth, we must all stretch ourselves personally so that we include those of us who may not live next door, or who may not look or talk or act as we do. Growth and success will make it easier for us to do so.
Walt Disney once said “Change is inevitable, growth is optional.” In the context of greater diversity and inclusion, a corollary is that neither change nor growth are inevitable. Rather, we must push ourselves to make them both happen. In doing so, however, we will find that inclusion and growth are mutually re-enforcing.
January 13, 2006
Bullish on the Chicago Metropolitan Economy
So far this decade, the Chicago metropolitan area's economic performance has been disappointing. As in the surrounding Midwest, job declines during the recent recession were worse here than in the nation as a whole, and this area’s job growth during the expansion has since been lagging. With this lackluster performance, there has been a special disappointment for Chicagoans; the metropolitan region’s economy led the nation and most of the surrounding Midwest during the 1990s. During that time, there was a sense that Chicago’s economy had evolved beyond its role as regional business capital into one as national and global business center.
What is Chicago’s outlook for 2006? I am optimistic, although there are some defensible reasons for caution. For one, goods producing industries in the surrounding region may continue to pull down Chicago’s service sectors. Chicago’s outsized business and professional service sector continues to serve the Midwest, as do its travel, distribution, and business meeting services. But looking ahead, the Midwest economic outlook is clouded by the prospects for its automotive industry. Nationally, automotive sales growth is not expected to be robust this coming year, especially for the Big Three automakers and their suppliers that populate the eastern part of the Midwest region as well as northern Illinois and southern Wisconsin. Accordingly, this segment of the Midwest cannot be expected to propel Chicago’s service economy in 2006.
There is a second reason to be cautious: National economic growth is expected to moderate modestly in 2006 (link). Since Chicago and the Midwest generally follow national trends—perhaps even follow them in a magnified fashion—there is some doubt that the metropolitan economy’s performance will gain momentum as the national economy moderates.
Still, despite these trends, and with a great deal of uncertainty, I offer some reasons for optimism for those of us who are inclined to be bullish about Chicago.
Not all of the surrounding Midwest manufacturing activity is moribund. The region’s capital goods industries, such as the machinery and equipment industry, are expanding. Looking forward, as national and global economic growth continues, U.S. and world demand for “new tools” and added production capacity tend to lift capital goods sectors. In turn, employment in manufacturing sectors, along with physical expansion of factories, tend to take place with a lag as excess capacity becomes squeezed.
More generally, recently reported data indicate that improvement in Chicago’s labor markets is already underway. During the autumn, Chicago's year-over-year payroll job growth exceeded 1 percent for the first time since the year 2000, while the unemployment rates were down in the fourth quarter (according to preliminary reports).
Chicago’s vaunted business and professional services industry is once more reporting strong employment growth. Though it has much catching up to do from its poor performance in recent years, Chicago’s year-over-year job growth in this sector is exceeding the nation’s.
In the travel and meeting arena, passenger arrivals to the Chicago area and hotel demand continue to recover. Plans for local conventions have edged up for 2006, as have planned developments of new hotel space.
Chicago’s financial exchanges also form a bright spot. Chicago’s importance as a financial center is defined by its exchanges and associated dealers and brokers. The Chicago exchanges can claim close to two-thirds of the volume of exchange-traded contracts in the U.S., and they once dominated global trading as well (link). However, in the 1990s, competing exchanges in Europe and Asia made strong gains in global market share, depressing the metropolitan area’s income and employment. But recently, Chicago’s two major exchanges, the Chicago Mercantile Exchange and the Chicago Board of Trade, have rebounded strongly. Not only are contract volumes up markedly, but both exchanges have gained market share on their global competitors over the past two years.
Chicago’s central area remains head and shoulders above all mid-continental contenders as a magnet for attracting younger skilled workers. Such workers are now greatly coveted for regional growth and development. A recent study of the 40 major U.S. metropolitan areas reported that Chicago’s downtown ranks sixth in the share of 25–34 year-olds, and Chicago experienced the third greatest percentage gains in this group (up 28%) during the last decade. Chicago’s downtown has the second highest share of residents with bachelor’s and advanced degrees with 67.6%, only behind Midtown Manhattan (link).
The Chicago area manufacturing sector was hit hard in the early years of the decade, especially in its own high tech hallmarks of IT and telecommunications manufacturers, such as Tellabs and the much larger Motorola. Thankfully, the region’s machinery and equipment sectors have bottomed out because national investment spending has recovered, growing at double-digit rates in 2004 and 2005. Such strong national demand for equipment and software is expected to continue into 2006.
In the high tech start-up arena, a flurry of activity took place in the Chicago area at the end of the last decade. Chicago’s timing was very unfortunate in this regard, coming in at the national peak of activity such that the Chicago region suffered greatly through the subsequent collapse. Now, however, the region’s technology businesses appear to be gathering steam once again for another push at realizing the metropolitan area’s full potential for technology start-ups. Positive developments include the Technology Development Fund of the Illinois Science and Technology Innovation Campus in Skokie, Illinois, and the research park expansion planned by the Illinois Institute of Technology. Tech commercialization policy initiatives are also moving forward. To name but a few of many, the Chicago Biomedical Consortium will be sharing new medical research equipment among Chicago area institutions, and the Midwest Research University Network will be cooperatively fostering start-ups out of Midwest universities and research labs.
The Chicago area economy has not been fortunate in recent years. Its economy is driven by its business service and headquarters functions; its role as distribution hub of the Midwest’s goods and materials; and its business travel/meeting activity. These sectors have been buffeted by weakness in the surrounding regional economy and, more globally, by weakness in manufacturing and business travel/meeting activity. Recent trends portend that Chicago’s performance will catch up with the nation’s somewhat in 2006.
October 27, 2005
Chicago's Exchanges Look to the Future
Last week, the Chicago Board of Trade (CBOT) became a publicly traded company. On the first day after offering its stock, its share price ended the day above $80, well above forecasts of a $45-50 value per share.
The CBOT development was one of many suggesting that the prospects of Chicago area’s futures exchanges have improved in recent years. But to what extent is the turnaround sustainable, and will this growth and success continue for one of Chicago’s hallmark industries?
Chicago’s importance as a financial center is defined by its exchanges and associated dealers and brokers. The Chicago exchanges can claim close to two-thirds of the volume of exchange-traded contracts in the U.S. A major assessment of the exchanges’ importance to the Chicago economy has not been conducted since 1997. (See Civic Committee of The Commercial Club of Chicago’s Report by the Risk Management Center, “Study of Financial Markets & Financial Services in Chicago,” 1997.) That study reported that 150,000 Chicago-area jobs could be attributed to the exchanges, and $35 billion in funds were on deposit at local banks to support Chicago’s exchange products. Many other linkages to Chicago’s economy, such as the needs of large local companies to balance their financial risks and risk exchanges’ ties with other financial and legal services firms and universities, were articulated in that report.
Chicago’s exchanges had long dominated global trading activity in futures and derivatives. But throughout the 1990s, the Chicago exchange community lost global market share. The figure below shows the growth in volumes of futures and options contracts traded on exchanges from 1987 to 2004. Trading volume at U.S. exchanges languished in the mid-1990s, even while growing rapidly throughout the rest of the world.
In the 1990s, competing exchanges in Europe and Asia made strong gains in market share. Electronic or computerized exchange facilitated overseas market locations partly by offering trading activity during hours when Chicago floor trading was not active. Ultimately, electronic trading also offered cost advantages for some existing products, while preserving important liquidity, clearing, and price-discovery properties as well. Overseas competitors adapted to and innovated electronic or computer-generated trading more successfully, and therefore captured markets that the Chicago exchanges might otherwise have claimed.
The Chicago exchanges also innovated and implemented systems of electronic trading, but their strong prior commitment to the open outcry or pit trading method of trading and price discovery perhaps impeded their success. So too, globalization of capital markets enhanced the demand for futures products overseas, along with a desire to trade around the clock. And so, electronic trading and the competitors who used it effectively were more successful in capturing growth in global demand.
But in recent years, Chicago’s two major exchanges, the Chicago Mercantile Exchange (CME) and the CBOT (CBOT), have rebounded strongly. Not only are contract volumes up markedly, but both exchanges have gained market share on their global competitors over the past two years. The CME reorganized from a mutual or member ownership structure to incorporation and public ownership, with an IPO in late 2002. Since that time, product and market expansion, enhanced services, and cost savings and price reductions on trades have boosted the CME’s market shares and sales. As of mid-October, the CME share price had increased ninefold since its IPO.
How did the Chicago exchanges turn it all around and what are their prospects? The answers are central to the future of the Chicago area’s economy. On October, 13, 2005, I participated on a panel convened by Bob DeYoung of the Chicago Fed at the Financial Management Association meetings. At the session, I noted that the exchanges’ success in recent years seems to parallel an unprecedented explosion of exchange-traded contracts worldwide. For example (as shown in the chart above), the volume of contracts expanded five times from 1999 to 2004. Much of this growth can be attributed to the continued deepening of capital markets and expanded funds flows as markets and firms continue to extend their global reach, along with heightened global uncertainty and economic upheaval. Have Chicago’s exchanges merely been riding the crest of the rising market, which would ultimately make it vulnerable to a worldwide slowing of exchange-traded contract growth?
The fact that Chicago’s exchange community has been gaining market share in recent years somewhat belies that interpretation. Furthermore, Kim Taylor, managing director & president, MERC Clearing House, showed that the CBOT’s market share among the four major global exchanges had risen from 19% in the second quarter of 2005 to 22% in the same quarter of 2006; the CME’s share rose from 27% to 33%. Taylor offered an alternative interpretation of the global growth of exchange-traded contracts. She argued that, far from riding the wave, the Chicago exchanges were partly responsible for the expanded demand for exchange-traded contracts worldwide through their own product and training innovations—especially at the CME. These efforts include expanded overseas trading capabilities in Europe and Asia, the consolidation of clearing operations for both of Chicago’s largest exchanges in 2003, enhanced electronic trading platforms, and new products. Bryan Durken, executive vice president and COO, CBOT, further explained that the CBOT’s success was hard won by “listening closely to the needs of their customers and acting quickly and creatively.”
But what was the source of the recent inspirations? Chicago’s exchanges had suffered through some rough periods when their traditional “membership” mode of organization, coupled with deep-seated cross-town rivalry, seemed to impede their transition toward computerized trading and other innovations. Chicago’s dominance was challenged to such an extent that Eurex US, an arm of a major European exchange, won approval to operate in Chicago in an attempt to topple CBOT’s market dominance of U.S. Treasury futures contracts. This attempt ultimately failed. And both the CME and the CBOT are now publicly traded companies, with the third major Chicago exchange, the Chicago Board Options Exchange, also moving toward de-mutualization.
In talking about Chicago’s recent success and its prospects, I also offered the idea of an “economic cluster” at the session. Economists such as Gerald Carlino describe the spatial concentration of some industries as being highly productive and often a formidable barrier to competition from market challengers. In this instance, over the course of its long and successful life, Chicago’s risk exchange community developed local assets like a deep pool of talent and supportive service firms, including local banks that understand their businesses, legal/consulting firms with specialized knowledge to service them, and local universities that produce new workers and new product ideas from finance professors. Might such a clustering of firms and assets have carried Chicago’s exchanges through a period when they were otherwise hobbled by their own outdated organizational structures?
Mike Cahill, CEO of The Options Clearing Corporation, noted that the specialized workers and other local personnel have been critical in maintaining Chicago’s exchanges. In particular, in areas such as contract product innovation, there is no question that Chicago’s historical role continues to provide the exchanges with striking advantages. However, Cahill also explained that Chicago’s strength and local assets have been weakened by technological changes that have lessened the need for “back office” activities to be located near the trading floor. Such operations have begun to move closer to far-away customers or where processing costs are cheaper. And as data manipulation and trading systems become more technical in nature, clearing operations and back office support are drawn to the technical workforce and technology firms of other regions.
Bob DeYoung asked whether the exchanges’ access to credit had been diminished with the loss of several major banks from Chicago. All of the industry panelists agreed that the loss of some major banks in Chicago had weakened the “cluster” of mutually dependent relationships among the exchanges, brokers, dealers, and banking community. It is not the case that the existing Chicago area lenders are not savvy and responsive partners. However, the choice spectrum of lenders is somewhat diminished, and with it some of the former willingness to fund and finance the small start-up companies.
The risk exchanges are a bright spot for Chicago and the Midwest even as many of its other industries are not sharing this luster. Local public policy is not a dominant force in determining the success of a local cluster such as this. Yet, it seems to me that it is worthwhile for us to understand our local industry clusters so that we continue to support—as appropriate—their supporting industries, their work force requirements, and their public service needs.
October 18, 2005
How Much Are Headquarters Worth?
Earlier this month, Mittal Steel USA announced it will locate its headquarters in downtown Chicago rather than in Northwest Indiana. Mittal USA employs 21,000 workers in 14 states. The parent company, Mittal, headquartered in London, is the largest steel maker in the world.
Mittal’s U.S. headquarters will employ only about 200 people. Even so, the company will reportedly receive $7.5 million in tax credits from the State of Illinois for job training and infrastructure, and the City of Chicago will contribute $2 million toward equipment, furniture, and fixtures. At a cost (undiscounted) of $40,000-$50,000 per job in tax incentives, why are public officials so pleased to have the Mittal headquarters?
For one reason, the Chicago area economy, along with the rest of the Midwest, is lagging the nation in this first decade of the millenium. Moreover, an intense matter of pride and branding of Chicago’s economy is at stake. The Chicago area ranks second only to the New York metro area as a headquarters city (figure 1). And, as reported by Lyssa Jenkens, chief economist of the Greater Dallas Chamber, even Sun Belt cities that are gaining headquarters admire Chicago and New York(Chicago Fed Letter). Yet, although Chicago snagged a big prize with Boeing’s move from Seattle in 2000, the city has lost other headquarters in recent years, such as Ameritech, BankOne, Quaker Oats, and Amoco.
Such concerns may lie behind the willingness of Chicago and Illinois to court relocating headquarters with tax incentives. So too, city and state development officials believe that the “ripple” effects of the headquarters will greatly augment the economic impact of the 200 direct jobs that the headquarters will bring. Part of these expected ripple effects are based on the tendencies of headquarters operations to purchase local business services, such as accounting, legal and financial, not only for their local operations but often for their entire organization.
This idea is borne out in a recent study by Yukako Ono (2002 Working Paper). In a statistical study using the 1992 plant-level data from the 1992 Annual Survey of Manufactures, Ono examines manufacturing plants’ outsourcing of advertising, bookkeeping, accounting, and legal services, and how the degree of plant outsourcing changes with the location of their headquarters. She finds that plants rely more on headquarters if their headquarters location offers a greater supply of such business services. And so, if business services in areas of accounting, legal, and finance are cheaper or more accessible in larger cities, headquarters operations will be motivated to locate there. Indeed, the CEO of Mittal USA cited the availability of support services such as accountants and lawyers in the company’s decision to locate in Chicago (Crain’s article).
In courting Mittal, Chicago may also be anxious to put back together the clustering of business functions that propelled its economy during the 1990s. Back then, business service employment expanded rapidly (previous blog), along with corporate and organizational headquarters. At the same time, both headquarters and business service establishments brought customers in, and sent company execs out, via booming O’Hare airport. Local business meetings and conventions added to the allure for those same customers and local execs, and Chicago’s diverse economy enhanced its reputation as a business capital city for the mid-continent and as an emerging global city.
From this perspective, the tax incentive package to Mittal appears to be thoughtful and stragetic. Still, in the aftermath of business relocations like this one, the question always lingers as to whether Mittal would have chosen Chicago anyway and paid full freight to boot. Even if Mittal had chosen Northwest Indiana in the absence of any incentive offer, it would not have greatly limited the company’s ability to purchase high-level business services from Chicago.
But apparently, Chicago is taking no chances. Tax sweeteners have become a signal to footloose firms that they are welcome, and that local government and civic organizations will partner with them in the future as the business environment changes. Chicago would like to see other headquarters follow Mittal’s lead.
September 28, 2005
Chicago — Regional capital or global business center?
The Chicago economy is expanding, but the pace of growth is disappointing compared with that experienced during the 1990s. This lagging performance raises some questions about the future. Will Chicago merely serve a supporting role as a services center for the surrounding Midwest, or can Chicago’s businesses expand their reach to more rapidly growing national and global markets?
Robust growth of jobs, income, and population during the 1990s left intact Chicago’s role as capital city of commerce for the broader Midwest, and then some. Some observers of the Chicago economy, including me (Global Chicago book), argued that Chicago was outgrowing its regional character. It was becoming a global city, with market ties and cultural recognition above and beyond the Midwest. This view boded well for the region’s long-term prospects, as the shrinkage in surrounding Midwest manufacturing and agriculture income would not hold Chicago back from a favorable performance among global cities.
However, those rosy predictions are somewhat at odds with the reality of Chicago’s performance over the past 4-5 years. The Chicago area is undoubtedly participating in the U.S. economy’s expansion. The airports are at capacity once again, hotel occupancy rates are climbing, some of the risk exchanges are swaggering a bit with profitability and outreach to foreign markets, and commercial office vacancy rates have leveled off. But the Chicago area economy continues to lag the U.S. economy. This follows a recession that hit the Chicago metropolitan area more severely than it hit the nation overall. Year over year (as of August), the Chicago area’s payroll employment grew just 0.8 percent, compared with 1.7 percent for the nation. The unemployment rate for August stood at 5.9 percent versus the nation’s 4.9 percent (figure 1). This extends a weak performance from year 2000. Annual data show that payroll employment declined -4.1 from 2000 to 2004, versus a -0.2 decline for the nation.
So what accounts for the city’s strong performance in the 1990s and what has changed for Chicago in recent years? Business and professional services, finance, and legal soared in the late 1980s and especially during the 1990s. The chart below, or something like it, is a bragging point for the city’s premier marketing promoter, World Business Chicago. In the 1990s, the Chicago area created more absolute jobs than other U.S. metro areas in the business and professional service industries, such as advertising, management consulting, accounting and the like. Chicago’s pace of growth didn’t keep up with some Sun Belt cities such as Atlanta and Dallas, where population was also growing strongly, but its performance was still outstanding. Chicago business service jobs climbed by 38 percent from 1990 to 2000, versus 54 percent for the nation.
This performance is also notable because of the simultaneous upheaval in the region’s traditional manufacturing base. By the early 1990s, Chicago area jobs in business services, legal, and finance came to exceed manufacturing. The city re-invented itself as a professional and business services center and business meeting place, while manufacturing jobs gave way to labor-saving productivity gains and manufacturing companies moved to smaller towns and overseas. Chicago became a powerhouse in business service headquarters, growing and attracting firms with global reach and stature such as Arthur Andersen and Leo Burnett. During the 1990s, Chicago gained 13 large company headquarters (Chicago Fed Letter). Convention and business meeting attendance continued to climb, along with Chicago’s travel connections to foreign business capitals.
But the declines in the pace of Chicago’s economic growth during the early years of this new century cause us to ask how much progress Chicago has really made in moving beyond its regional role. From 2000 to 2002, the Midwest’s payroll employment decline was about double the nation’s, and Chicago’s job decline followed the region’s fortunes rather than taking a more independent course. This might be because Chicago’s service industries sell to local midwestern customers who manufacture and farm.
If we look at the recent performance of Chicago’s business service sector (below), the deviation from national performance is below par in this very arena where Chicago had been doing so well during the 1990s. Up until the last few months, year over year job gains had fallen well short of the nation over the past 3-4 years.
At the tail end of the chart above, some observers will find hope in the evidence that professional/business service job growth in the metro area is showing renewed signs of life. A competing hypothesis to Chicago’s confining destiny as a regional capital would argue that Chicago has experienced some unique and transitory shocks to its business service economy during the early years of the new century. These might include the evaporation of Arthur Andersen, the post-September 11 decline in business travel, and the fallout from overinvestment and expansion in IT/tech-related goods and services in the 1990s that left Chicago’s burgeoning tech consulting businesses with excess payrolls. As the metro area economy works through these shocks, Chicago may rediscover its path to success as a global city—a city “with a head on its shoulders” rather than solely a “city of big shoulders.”
Indeed, it is this future that the City of Chicago is banking on as it launches plans for a $14.7 billion expansion and reconfiguration of Chicago O’Hare International Airport.