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The Location Quotient (LQ) is an interesting tool used in community development, economics, urban planning and related fields as part of what is called Economic Base Analysis. This is an important tool for local communities to understand, as it can help them with their economic and community development activities.
Economic Base Analysis
Economic base analysis was developed by the economist Robert Murray Haig and first published in 1928. In economic base analysis, you split all activities into basic and non-basic activities. Basic activities or industries are those that either produce surplus resources or those that are funded with money from outside of the region. An example of a basic industry would be a factory that produces a product for sale in other communities than just their own.
Non-basic activities are those that support the local community but do not produce “excess.” An example would be a hair salon or a diner, as well as small-scale manufacturing that only produces enough to meet local needs.
In order to make use of the basic/non-basic classification we must operationalize this data, or find a proxy that allows us to see the difference in these two values. For this, we use employment data of different industries.
Calculating the Location Quotient
If the employment rate of an industry is greater in a community than the state or national rate (depending on the community we’re looking at), we consider that additional amount “basic.” This is an industry that is giving more to our community than other industries. Likewise, if the rate of employment is lower that industry is non-basic to us.
In order to calculate this, we use the Location Quotient. The Location Quotient formula involves taking a comparison group (in our case, the State of Iowa) and looking at the Bureau of Labor Statistics (BLS) data for Keokuk County in each industry. Once we know what percentage that each of these industries is to the total employment in the county we can perform the same calculation with the State as a whole to determine how Keokuk is different.
For example, according to BLS data there were 5440 workers in Keokuk County in 2017. 104 of those workers worked in Construction, or 1.91% of the 5440 workers. In the state as a whole, there are 76,086 construction workers (out of a total of 4,142,821 workers.) The percentage for the State is 1.84%.
Dividing our 1.91% at the County level by the 1.84% at the State level gives us our Location Quotient of 1.04. This means there are nearly the same amount of construction workers in Keokuk as there are in the State as a whole.
Location Quotient (LQ) in Keokuk County, Iowa
The LQ in Keokuk ranges from a low of 0.29 for State Government workers to a high of 6.13 for those in Natural Resources and Mining. This has important considerations for our economic development: we have opportunities in Keokuk to attract business and professional services (LQ of 0.53), Information and Financial Services (both with an LQ of 0.70) and Education and Health Services (LQ of 0.75) businesses.
As well, we need to be careful to watch for events that may the affect natural resources and mining industry because this employment is much more important to Keokuk than the rest of the State.