© Copyright 2002 by the Wyoming Department of Employment, Research & Planning
Is Wyoming's Economy Diversifying and Is Economic Diversity in Wyoming Desirable?
by: Mark A. Harris, Sociologist, Ph.D.
"The question is whether Wyoming's economy can continue to diversify without negatively impacting wages further. The answer is yes, provided growth is encouraged in industries, which, like mining, offer higher wages."
Scholars speculate that a diversified economy is less subject to the ups and downs associated with any particular industry because risk is spread more evenly across a number of industries. In reference to the U.S. as a whole, the Federal Reserve Bank of New York argues that,
by developing a diversified economy, a country can make sure that even if some industries are suffering, other, more competitive industries [at the time] will keep the economy relatively
If true, diversification is desirable. Past research indicates that Wyoming is subject to economic ups and downs, particularly in the Mining industry.2 Theoretically speaking, increasing Wyoming’s economic diversity should soften the impact of employment loss in any particular industry.
This article presents a method and analysis of the degree of diversification in industry employment in Wyoming’s economy over time. It also compares relative diversity to annual average wages expressed in real dollars.3 Research and Planning (R&P) does not profess to know what is “best” for Wyoming’s economy in terms of proportional industry employment mix. We have the data and methodology to evaluate the State’s economy relative to the nation (or other theoretically interesting employment and earnings distributions), but do not propose that this comparison represents the ideal from a theoretical standpoint. The analysis instead demonstrates a strategy to evaluate relative diversity and associated factors. Additional work needs to be done to determine the optimum industry employment mix for Wyoming. However, that question is an economic, theoretical, and political issue beyond the scope or intent of this article.
Research findings presented here indicate that the industrial structure of Wyoming’s economy has become more diversified making it more similar to the U.S. since Wyoming’s energy boom of the 1970s to early 1980s (Figure 1 indicates that the height of the boom was in 1981). However, even with increasing diversification, Wyoming’s economy remains very different from the nation’s. Additionally, increased diversity appears negatively related to average wages, at least until recently. Diversity has not, historically nor in the current period, been associated with expanding work-related earnings.
Data for this study, including national and Wyoming wage and salary employment by industry and Wyoming wage and salary disbursements by industry, come from the U.S. Bureau of Economic Analysis (BEA).4 BEA data are utilized because they offer consistent employment and wage information over the 30-year time period.5
Wyoming employment Industry Index of Diversity (IID) scores are calculated as
where Si is the state share of employment in industry i, Si* is the U.S. share of employment in industry i, and n is the number of industries.6 As the state share of employment approaches the U.S. share across major industry groups, the IID approaches zero. As the state share of employment across major industry groups diverges from the U.S. economy, the IID becomes increasingly larger. The IID can be considered a relative measure of economic diversity because it measures the amount of disparity between the U.S. and Wyoming industry distributions. To illustrate, Table 1 shows the IID values for Wyoming and Colorado in 1998 and 2000. The 1998 IID score for Wyoming (2.9401) is much larger than Colorado’s (.0028) indicating that Colorado’s economy looks more like the U.S. than Wyoming’s does. Wyoming’s share of employment is most different from the U.S. in the Manufacturing and Government industries. Manufacturing in Wyoming (4.6%) is smaller than the U.S. (14.2%); Government in Wyoming (25.8%) is larger than the U.S. (16.6%).
Wyoming’s real annual average wage is calculated as CPI-U (Consumer Price Index, All Urban Consumers) adjusted nonfarm and salary disbursements7 divided by nonfarm wage and salary employment. The quotient represents real wages expressed in 2000 dollars. Adjusting for inflation allows for comparison of wages across time.
Is Wyoming’s Economy Diversifying?
Figure 2 presents IID and average weekly wage data from 1970 to 2000. The level of relative economic diversity in Wyoming varies substantially over time. Recall that higher IID numbers mean less economic diversity. Stated differently, larger IIDs indicate greater divergence from the national economy. The period from the late 1970s to early 1980s (Wyoming’s energy boom) represents the least amount of economic diversity. Subsequent to the boom, Wyoming’s economy became increasingly similar to the U.S. economy. Over the 30-year time period, the IID was at its lowest level in 2000 at 2.7351. The high point was at 5.8834 in 1981, the peak of the energy boom.
The two industries that account for the largest changes in Wyoming’s IID over time are Mining and Manufacturing. Figure 3 indicates that Wyoming has a much larger proportion of employment in Mining than the nation. Decreases in Wyoming’s relative diversity during the late 1970s and early 1980s are largely accounted for by the proportionate increase in Mining employment. Figure 4 shows that the U.S. proportion of employment in Manufacturing has decreased substantially over the 30-year period, from a high of 25.1 percent in 1970 to a low of 13.4 percent in 2000. Wyoming’s proportion of employment in Manufacturing has remained relatively constant at about 5 percent over this time period. Decreases in Wyoming’s IID from the mid-1980s to 2000 are largely accounted for by the decrease in the U.S. share of employment in Manufacturing (i.e., over time, the U.S. and Wyoming are becoming increasingly similar in Manufacturing).
Overall, the IID indicates that Wyoming’s economy has diversified or become more similar to the nation’s economy since the boom period. Changes in the level of economic diversity have been tied closely to changes in Mining in Wyoming and changes in Manufacturing in the U.S.
Does Economic Diversity Benefit Wyoming?
Economic diversity may make Wyoming’s economy less vulnerable to the ups and downs in any particular industry. However, it may also have other consequences. The question R&P sought to answer in this analysis was, “What is the relationship between economic diversity and real wages?” To answer this question, R&P plotted real annual average wages in 2000 dollars against the IID scores. Figure 2 generally indicates that there is a close relationship between real wages and economic diversity. Historically speaking, as Wyoming’s economy becomes divergent from the nation’s economy (i.e., larger IID scores), Wyoming’s real wages increase. When Wyoming’s industry employment distribution becomes more like the nation’s, Wyoming’s real wages decline. This pattern is generally true, except that wages began to increase in 1996. A statistical test of the data indicates a fairly robust, significant positive correlation between the IID scores and real wages (r=.87, p<.001). It will be interesting to see whether the more recent pattern of increasing diversity (i.e., lower IID scores) and increasing wages continues into the future. The more recent increase in the annual average wage could be attributed to growth in higher paying sub-industries within major industries, a general tightening of the labor market during this period, and/or increases in the magnitude of paid bonuses. Future research will address this issue more closely.
From the standpoint of wages, it would appear that increasing economic diversity relative to the U.S. economy, at least as experienced so far, has been detrimental to real wages in Wyoming. Some may be concerned that diversifying Wyoming’s economy, as defined here, implies less employment in Mining and thus a loss of high paying jobs. However, diversifying the economy does not necessarily mean a reduction in the number of jobs in Mining. In fact, Mining can continue to grow, and Wyoming’s overall economy can continue to diversify at the same time, provided other industries grow faster.
Two likely candidates for increasing diversity are Manufacturing and Services. In 2000, Manufacturing made up only 4.6 percent of Wyoming’s economy, but 13.4 percent of the U.S. economy (see Figure 4). Increasing Manufacturing’s share of Wyoming’s economy would likely result in a smaller IID (i.e., greater relative diversity). As can be seen in Figure 5, Wyoming also had a smaller share of employment in Services in 2000 than the nation (23.1% and 30.5%, respectively). This difference has been increasing over time. Increased employment in Services would also serve to reduce the IID, net of other changes.
The relative share of Manufacturing employment has been declining in the nation as a whole (see Figure 4) due to technological improvements and relocation to other nations. Relocation to other nations is driven by more favorable taxes, fewer environmental regulations, and lower labor costs.8 As shown in Figure 4, Wyoming seems to demonstrate a capacity to retain a constant relative share in Manufacturing employment while the U.S. does not. Thus, relocating Manufacturing firms to Wyoming may incur less risk of future employment loss than other locations in the nation.
Steady growth in Services has occurred both in the U.S. and Wyoming over the period from 1970 to 2000 (see Figure 5). As such, encouraging growth in this industry may be associated with less overall risk than Manufacturing. While Manufacturing does have higher annual average wages than Services (see Table 2), growth in particular sub-industries within Services could offer wages in Wyoming that are competitive with or may exceed annual average wages in Manufacturing (e.g., health services and engineering & management services).9 However, growth in low-wage Services industries could depress growth in Wyoming’s annual average wage.
Wyoming’s economy has diversified since the boom and throughout the period of the 1990s. This may help buffer Wyoming against economic ups and downs in any particular industry. However, increased diversity for Wyoming, as currently constituted, appears to be consistent with lower wages. The question is whether Wyoming’s economy can continue to diversify without negatively impacting wages further. The answer is yes, provided growth is encouraged in industries which, like mining, offer higher wages. To this end, the State and its communities may want to consider attracting Manufacturing and/or high-wage Services firms into Wyoming. Of course, our ability to do this rests on many factors, including our ability to provide the labor and satisfy employers’ needs with respect to the quality of that labor.
1Federal Reserve Bank of New York, “Benefits of Trade,” The Basics of Foreign Trade and Exchange, September 4, 2002 (September 13, 2002).
2Sherry Yu, “Thirty Years of Wyoming Employment and Wages,” Wyoming Labor Force Trends, August 2002.
3Because inflation erodes consumers’ purchasing power, a given dollar amount of income will not purchase the same amount of goods from one year to the next. Real wages are the actual paid wages (nominal wages) adjusted for inflation. To account for inflation, we use consumer price indexes to adjust the nominal wage to the real wage. The consumer price index used here is “All Urban Consumers - (CPI-U) U.S. city average, all items,” available online at <ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt>.
4U.S. Department of Commerce, Bureau of Economic Analysis, Regional Accounts Data, Tables SA07 and SA27, April 23, 2002, <http://www.bea.gov/bea/regional/spi/> (September 5, 2002).
5The vast majority of earnings and employment data utilized by the Bureau of Economic Analysis (BEA) are originally produced by state research offices as part of the Bureau of Labor Statistics (BLS) ES-202 program. Unfortunately, the ES-202 data do not form a consistent time series. The methodology used for this analysis requires a history of employment and earnings data organized in consistent industrial categories, thus we rely upon BEA’s transformed data. The current research is based on the Standard Industrial Classification (SIC) system.
6Adapted from Tim R. Smith, “The Relationship between the Tenth District Economy and the National Economy,” Federal Reserve Bank of Kansas City Economic Review, Volume 81, Number 4, 1996.
7U.S. Bureau of Labor Statistics Consumer Price Index (CPI) numbers come from Consumer Price Index-All Urban Consumers at <http://stats.bls.gov/cpi/#data>. CPI adjusted nonfarm and salary disbursements are calculated by dividing the CPI index by 172.2, then dividing the nonfarm wage and salary disbursement by this number. For example, the CPI for 1970 is 38.8 and the Wyoming nonfarm wage and salary disbursement for 1970 is 753,863,000. The CPI adjusted Wyoming nonfarm and salary disbursement for 1970 is 753,863,00/(38.8/172.2) = 3,345,752,799.
8William Julias Wilson, When Work Disappears: The World of the New Urban Poor, 1997.
9Health services and engineering & management services in Wyoming in 2000 had annual average wages of $32,136 and $37,161, respectively.
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