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).
Click to enlarge.
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.
Click to enlarge.
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.
Posted by Testa at 11:15 AM | Comments (0)
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.
Click to enlarge.
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.
Posted by Testa at 10:37 AM | Comments (2)
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.
Click to enlarge image.
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.
Click to enlarge image.
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.
Click to enlarge image.
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.
Click to enlarge image.
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.
Posted by Testa at 1:56 PM | Comments (0)