731599

research-article2017
EDQXXX10.1177/0891242417731599Economic Development QuarterlyPallares and Adkisson

Research and Practice

Economic Development Quarterly

The Impact of Industrial Diversification on

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© The Author(s) 2017
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DOI: 10.1177/0891242417731599
https://doi.org/10.1177/0891242417731599

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Francisco J. Pallares1 and Richard V. Adkisson2

Abstract
Economic developers express concern for both employment growth and employment stability. This study asks whether
there is a trade-off between the quantity and reliability of jobs. Does industrial diversification, presumed to lead to more
reliable jobs, have an impact (perhaps negative) on overall job growth? Using data from the 50 U.S. states from 2000 to 2013,
this study explores the relationships between employment growth and industrial diversification measured in four ways. The
results are mixed, suggesting that overreliance on employment in stable industries might retard employment growth but that
overreliance on employment in volatile industries does not have a clear positive or negative impact on employment growth.

Keywords
employment growth, diversification, regional economic development

Volatility implies unreliability and irregularity, conditions
that introduce uncertainty into many business and economic
decisions, as well as potentially disturbing individual and
community well-being. As examples, economic volatility of
one type or another has been shown to be related to crime
(Bausman & Goe, 2004), economic growth (Mobarak, 2005),
imports (Kenen & Rodrik, 1986), food security (Naylor &
Falcon, 2010), and private investment (Aizenman & Marion,
1999). The potential negative impacts of excessive economic
volatility have not been lost on students of local and regional
economic development.
Although economic development thinking has evolved
through time (Bradshaw & Blakely, 1999; Reese, 2014), the
ultimate goal of economic development policies and actions
is typically the creation or attraction of jobs for local resi-
dents (Sparks, 2013). However, as stated in a document of
the International Economic Development Council, simply
“creating jobs” is no longer a sufficient economic develop-
ment plan (Anderson et al., 2010). Economic development is
now focused on creating reliable (nonvolatile) “quality jobs,”
preferably with high wages (Anderson et al., 2010).
Unreliable unemployment is seen as one of the two funda-
mental problems associated with economic volatility
(Baldwin & Brown, 2004).
Employment volatility can be driven by business cycle
fluctuations, seasonal fluctuations, industry-specific shocks,
and exchange rate fluctuations, among other things.
Typically, diversification is seen as a means to reduce to
volatility (Chen, 2014; Dammon, Zhang, & Spatt, 2001;
Mayer, Wang, Egginton, & Flint, 2012; Scordis, 2000). If
this is correct, a more diversified economy would be
expected to suffer less employment volatility when com-
pared with a less diversified economy. Where job reliability/
stability is a goal, an industrial diversification strategy
would seem warranted.
Job reliability may be desirable, but it is not the only goal
for economic development. Overall growth in jobs (employ-
ment) is also a major, perhaps primary, goal of local and
regional economic development. Stable and high-quality
jobs may be more difficult to attain, if for no other reason
than many regions compete to attract them. Thus, an interest-
ing question is to ask whether diversification, presumed to
lead to more reliable jobs, has an impact on overall job
growth. Rephrased in the negative, does overreliance on vol-
atile industries and/or industrial concentration (suggesting a
lack of diversification) affect job growth and, if so, in what
direction? Diversification hedges against both upside and
downside risk. Is there a trade-off between the quantity and
reliability of jobs?
The purpose of this study is to investigate whether a lack
of diversity in employment, proxied by concentration in vol-
atile industries, reliance on exports, and general industrial
1
Austin Community College, Round Rock, TX, USA
2
New Mexico State University, Las Cruces, NM, USA
Corresponding Author:
Richard V. Adkisson, Department of Economics, Applied Statistics, and
International Business, New Mexico State University, MSC 3CQ,
Box 30001, Las Cruces, NM 88003-8001, USA.
Email: radkisso@nmsu.edu
2 Economic Development Quarterly 00(0)
Figure 1.  Percentage change in wage and salary employment from previous year 2000-2014, U.S. national and state range.
Note. Data from Bureau of Economic Analysis, regional accounts, SA4, personal income and employment by major component, wage and salary
employment.
concentration, affects employment growth. Data from the 50
states are observed over the years 2000 to 2013. The knowl-
edge generated from this study should be useful in shaping
future state economic development policy.
Background
The National Bureau of Economic Research reported two
recessionary periods in the post-2000 period. The first lasted
from the first quarter of 2001 through the fourth quarter of
2001. The second, the more severe of the two, began in the
fourth quarter of 2007 and concluded in the second quarter of
2009, although the recovery has been sluggish. The impact
of these recessions on employment1 growth is obvious in
Figure 1, which also shows the range of employment growth
rates across the 50 states. Beyond the national trend, state-
by-state employment growth rates vary substantially within
certain years. For example, from 1999-2000, national wage
and salary employment grew by 2.1%, while state employ-
ment growth varied from -0.1% (Mississippi) to 4.2%
(Nevada). In 2009, the depth of the Great Recession, the
national change was -4.3% with the state range from -8.9%
(Nevada) to 0% (Alaska). By 2014 the employment growth
range narrowed to a range of −0.4% (West Virginia) to 4.0%
(North Dakota).
Literature Review
This literature review serves two purposes. The first is to
understand the post–World War II trend toward macroeco-
nomic stability and the pre-Great Recession moderation
debate. This is included primarily to document that reduced
economic volatility is generally seen as a positive economic
sign. The second purpose is to explore possible sources of
variations in employment growth and volatility to guide the
empirical work.
Macroeconomic Stability: It Is a Good Thing
Prior to the Great Recession of 2007-2009, many economists
expressed their delight at what seemed to be a taming of the
business cycle. Arthur Burns (1960,1969) wrote “[T]hat
although our economy continues to be swayed by the business
cycle, its impact on the lives and fortunes of individuals has
been substantially reduced in our generation” (p. 102). Burns
credits the evolution of corporate practice, better government
financing, improved unemployment insurance and social
security, and lower reliance on traditionally volatile industries
for the moderation. Similarly, Warnock and Warnock (2000)
suggested that the source of increased stability is a dramatic
post–World War II structural transformation with the United
States becoming less reliant on volatile industries. Stock and
Watson (2003) provided further documentation of the modera-
tion trend. Although the Great Moderation idea has been
deflated by the Great Recession, the topic continues to attract
research interest; perhaps this is because stability continues to
be considered a positive economic outcome.
Reduced macroeconomic volatility has numerous bene-
fits: decreased price volatility, improved market functioning,
easier economic planning, and reduced resources devoted to
hedging inflation risks. Lower volatility of output implies
more stable employment and a reduction in the extent of eco-
nomic uncertainty confronting households and firms
(Bernanke, 2004). In the international context, Koren and
Tenreyro (2007) found employment volatility to be an impor-
tant reason why poor nations remain poor. Baldwin and
Brown (2004) specifically mentioned the possibility of a
growth/stability trade-off.
Regional Variation in Employment Growth
Researchers have explored the role industrial specialization/
diversification plays in economic growth (Conroy, 1975),
Pallares and Adkisson 3
real per-capita income (Grennes, Guerron-Quintana, &
Leblebicioglu, 2010), wages/productivity (Kemeny &
Storper, 2015), and unemployment and per-capita income
(Attaran, 1986). Substantial prior research focused primarily
on the impact of diversification on employment volatility
rather than growth, although the two are potentially related.
Kort (1981) examined employment volatility across 106
metropolitan statistical areas during the 1967-1976 period.
He concluded that industrial diversification plays a role in
employment volatility, but also found evidence that employ-
ment volatility varies with city size. Malizia and Ke (1993)
observed U.S. metropolitan statistical areas over the 1972-
1988 period and concluded that reliance on highly volatile
industries, especially mining and manufacturing, tends to
increase both unemployment and employment volatility.
Felix (2012) studied the Tenth District of the U.S. Federal
Reserve System to test whether industrial diversity by county
is associated with employment growth. Felix found that
more industrially diverse counties have more stable growth,
but that long-run employment growth does not seem to be
affected by industrial diversity.
Industrial diversification is not the only potential influ-
ence over employment volatility and growth. Cabrales and
Hopenhayn (1997) studied the impacts of regionally differ-
ent labor market regulations in Spain. Labor market restric-
tions in Spain are associated with lower turnover and lower
productivity; however, the evidence associating it with
higher unemployment is not strong. Blanchard (1997) was
critical of their methods, but agreed that the topic is worthy
of study. Partridge and Rickman (1996) investigated the
influences that industry composition and traditional cost fac-
tors such as wages and unionization have on state employ-
ment growth. Using unionization as a proxy for variation in
state-level labor climates, their results provided no evidence
that union membership affects employment growth.
International linkages may also influence employment
volatility and potentially employment growth. Ocegueda,
Escamilla, and Mungaray (2011) studied employment vol-
atility in the northern Mexican states that are heavily reli-
ant on manufacturing (maquiladoras). Among other
influences, they indicated that the high correlation of
Mexican and U.S. business cycles makes the northern
Mexican states especially vulnerable to employment vola-
tility. Buch and Schlotter (2013) explored the links between
trade openness and employment volatility in German
states. Their evidence suggested that higher shares of ser-
vice-sector employment, higher unionization, and higher
shares of long-term unemployment are associated with
lower employment volatility. Buch and Schlotter (2013)
concluded that volatility of employment is not linked to
trade openness, at least in most German states. The excep-
tions are states hosting international harbors. Spatial
impacts within national regions are also possible (Komarek
& Loveridge, 2013; Overman & Puga, 2002).
To conclude, the review above suggests that a variety of
possible influences on employment growth, overall industrial
concentration, concentration in specific industries, interna-
tional openness, size of the economy, labor regulations/rigidi-
ties, and spatial effects could be present as well. The empirical
model developed below operationalizes these factors and
includes a few control variables not mentioned above.
The Data, Model, and Method
The purpose of this research is to ask whether overreliance
on volatile or export industries and/or general industrial con-
centration affects job growth and, if so, in what direction. As
discussed earlier, the motivation is that economic develop-
ment authorities typically seek both to attract a high quantity
of jobs and at the same time target high-quality and reliable,
but presumably scarcer, jobs. Together this raises the possi-
bility of a trade-off between attracting industries promising
jobs in quantity and attracting industries promising more
reliable, but possibly fewer, jobs.
Specifically, this study examines the impact of industrial
concentration/diversification and export exposure on the
growth of wage and salary employment. The specification of
the empirical model is driven by the literature reviewed
above and examples of empirical growth models provided by
Reed (2009), Monchuk, Miranowski, Hayes, and Babcock
(2007), Carlino and Mills (1987), and Peach and Starbuck
(2011). As is typical, these authors used modified growth
models to measure economic growth (variously defined).
The particular variables included in their empirical models
vary with their purposes. In the present case, EMPGROW,
the year-to-year percentage change in wage and salary state
employment (annual employment growth), serves as the
dependent variable.2
The Data
The independent variables of primary interest are the
Herfindahl–Hirschman Index (HHI) to measure general
industrial concentration; SNONVOL, the percentage of state
employment in nonvolatile industries; and SVOL, the per-
centage of state employment in volatile industries.
SNONVOL and SVOL measure a state’s relative reliance on
volatile industries. When grouped, industries that are indi-
vidually highly volatile could appear less volatile if industry
cycles are offsetting, so SVOL (and SNONVOL) are entered
in the model alternatively as states’ shares of employment in
the five most volatile and least volatile industries. Location
quotients are also used as an alternative measure of states’
relative reliance on volatile and nonvolatile industries.
LQNVOL is the location quotient for employment in non-
volatile industries. LQNVOL measures the concentration of
nonvolatile employment in a state compared with nonvola-
tile industry employment in the nation. LQVOL is the
4 Economic Development Quarterly 00(0)

location quotient of employment in volatile industries for a Table 1.  Descriptions and Sources of Variables.
state relative to the nation’s employment in volatile indus- Variable Description Sourcea
tries. OPENNESS, state exports as a percentage of state
gross domestic product, measures state export exposure. Dependent variable
 EMPGROW The percentage change in state 1
The observed data come from the 50 U.S. states over the
wage and salary employment from
years 2000 to 2013, a total of 700 observations. Table 1 pro- previous year, 2000 to 2013
vides a brief description of the variables used in the model. Independent variables
Justification for their inclusion and detailed information are  HHI Annual Herfindahl–Hirschman Index by 1
provided below. state from 2000 to 2013. Calculated
using total full-time and part-time
The HHI is a standard way of comparing industrial con- employment in 92 NAICS industries
centration across industries. HHI is calculated by summing  SNONVOL A state’s percentage of total full-time 1
the squared percentage market shares of all firms in an indus- and part-time employment in
try as in the equation below: nonvolatile industries as measured
by five industries with the lowest
n employment coefficients of variation
HHI = ∑s .
i =1
2
i
 SVOL
from 2000 to 2013
A state’s percentage of total full-time 1
and part-time employment in
volatile industries as measured by
In this equation, s is the market share of firm I and n is the
the five industries with the highest
number of firms in the industry. employment coefficients of variation
The squaring accentuates the effects of firms with particu- from 2000 to 2013
larly large market shares. The range of possible HHI values  LQNVOL State’s location quotient, state 1
is from near 0 to 10,000. A firm with a 100% market share employment nonvolatile industries
relative to national employment
(pure monopoly) would have a HHI of 10,000. As an indus- in same using five industries with
try becomes less concentrated (more competitive), its HHI lowest employment coefficients of
moves toward zero. In this case, the HHI is modified to mea- variation from 2000 to 2013
sure concentration across industries. State HHI values were  LQVOL State’s location quotient, state 1
employment volatile industries
calculated using U.S. Bureau of Economic Analysis total relative to national employment
full-time and part-time employment by 92 North American in same using five industries with
Industry Classification System (NAICS) industries. In the highest employment coefficients of
modified version, s represents the share of a state’s employ- variation from 2000 to 2013
 OPENNESS Export openness, measured as the 2
ment in industry i and n is the total number of industries, 92 percentage of exports to GDP by
in this case. The more concentrated a state’s employment in state from 2000 to 2013
a few sectors, the higher its HHI.  RPCGDP Real per capita GDP (2009 U.S. 1
The shares of volatile (SVOL) and nonvolatile dollars) by state from 2000 to 2013
(SNONVOL) industries are calculated as follows. First,  POPGROW State population growth from previous 4
year expressed in percentage terms
national-level data on wage and salary employment in 20  LFPRCH2 Percentage change in the labor force 5
U.S. Bureau of Economic Analysis–reported NAICS sectors participation rate from previous year,
for 2000 to 2013 were gathered. Second, the mean and stan- both sexes, squared
dard deviation of 2000-2013 annual employment in each  UNEMPLAG State unemployment rate lagged 1 year 5
sector was calculated. Third, coefficients of variation (stan-  UNION Percentage of employed persons who 3
are union members, by state
dard deviation divided by mean) were calculated for each  Y2000-Y2013 Dummy variables to identify year of  
industry. Finally, industries were sorted by their employment observation, Y2000 is the base year
coefficients of variation. The five most volatile and five least
Note. NAICS = North American Industry Classification System.
volatile industries are listed in Table 2. a
1. Bureau of Economic Analysis (2013): Regional economic accounts (retrieved from
The SVOL and the SNONVOL variables provide infor- http://www.bea.gov). 2. U.S. Department of Commerce (2013): International trade
mation that the HHI is unable to provide. For example, even administration (retrieved from http://tse.export.gov). 3. Bureau of Labor Statistics
(2013): Economic news release (retrieved from www.bls.gov). 4. U.S. Census Bureau:
if a state relies fairly heavily on employment in volatile Table 1—Intercensal estimates of the resident population for the United States,
industries the HHI could still be small. The HHI provides regions, states, and Puerto Rico: April 1, 2000 to July 1, 2010 and Table 1—Annual
estimates of the resident population for the United States, regions, states, and
insight in the concentration of employment across broad Puerto Rico: April 1, 2010 to July 1, 2014. 5. Bureau of Labor Statistics—Local area
industries, but it does not help to distinguish whether or not unemployment statistics, states, and selected areas: Employment status of the civilian
noninstitutional population, 1976-2015.
these industries are volatile. Thus, including the SVOL,
SNONVOL, and HHI in the same model should not create
problems. Variance inflation factors (VIFs) are calculated at growth in employment for 10 states with the highest propor-
the estimation stage to verify this. Figure 2 indicates average tion of employment with volatile industries and nonvolatile
Pallares and Adkisson 5

Table 2.  NAICS Sector Volatility Rank.

Rank BEA code Most volatile CV BEA code Least volatile CV

1 200 Mining 0.168 600 Wholesale trade 0.028
2 500 Manufacturing 0.131 1000 Finance and insurance 0.025
3 400 Construction 0.118 2000 Government and government enterprises 0.022
4 900 Information 0.104 1900 Other services (except public administration) 0.0220
5 1500 Educational services 0.101 700 Retail trade 0.022

Note. BEA = U.S. Bureau of Economic Analysis; NAICS = North American Industry Classification System; CV = coefficient of variation. Source: Authors’
calculations using data from BEA (2013): Regional economic accounts (retrieved from http://www.bea.gov).

Figure 2.  Average growth in employment for top 10 states with highest volatile/nonvolatile share in employment.
Note. From authors’ calculations with data from Bureau of Economic Analysis, regional accounts, SA4, personal income and employment by major
component, wage and salary employment.

industries. Figure 2 shows that states more reliant on volatile
industries tend to have more intense movements in their
employment growth rates when compared with states that
are more reliant on nonvolatile industries. The influence of
the business cycle on both groups is also evident.
The location quotient of industries in volatile (LQVOL)
and nonvolatile (LQNVOL) industries are used as alternative
measures of concentration in volatile or nonvolatile sectors
for the states. LQs are calculated as follows:
E Xi EYi
ETi LQNVOL ETi ,
=
LQVOLXi = Yi
E Xb EYb
ETi ETi
where E = employment, X = top 5 volatile industries as iden-
tified in Table 2, Y = top 5 nonvolatile industries as identified
in Table 2, T = total employment, i = state, and b = national.
A location quotient equal to 1 indicates that state employ-
ment in the top five volatile or nonvolatile industries is the
exact percentage of the nation’s employment in those indus-
tries. Values greater than or less than 1 mean that the state has
relatively higher or lower (respectively) employment in the
industry (volatile or nonvolatile) than the nation. The LQVOL
and the LQNVOL provide slightly different information than
SVOL and SNONVOL. The location quotients norm state
employment to a national standard, while the share measures
norm to a state’s total employment in all industries. Using
them as alternative measures helps check the robustness of
the model estimated below.
The variables SVOL, SNONVOL, LQVOL, LQNVOL,
HHI, and OPENNESS are the variables of primary interest in
this work. In particular, a state that is heavily reliant on vola-
tile, a concentrated few, or export industries may be subject
to external economic shocks (volatility) than would a more
evenly diversified state. Several control variables are
included to account for other possible influences on employ-
ment growth.
The variable RPCGDP is included to control for the over-
all levels of state economic development. Hints in the litera-
ture and an initial examination of the data suggested a
nonlinear relationship between RPCGDP and EMPGROW,
so a squared term of RPCGDP was initially calculated in the
estimation; although, after the estimation it was statistically
insignificant and was therefore omitted from the models.
Hypothetically, a higher level of development, proxied by
RPCGDP, would invite higher employment growth.
Several variables are included to control for factors that
could influence a state’s employment growth. The popula-
tion growth from the previous year (POPGROW) is expected
6 Economic Development Quarterly 00(0)

to relate positively with EMPGROW. A change in labor force Table 3.  Descriptive Statistics, Continuous Variables.
participation rate could also be influential. Other things equal
Mean Minimum Maximum
a growing labor force participation rate affects the availabil-
ity of workers for hire and thus one might expect a positive EMPGROW 0.47 −8.9 8.2
relationship with employment growth (EMPGROW). Early HHI 374.43 298.00 561.52
analysis indicated a possible nonlinear relationship, so the SVOL 19.58 10.03 29.71
percentage change in labor force participation is entered in LQVOL 1.01 0.36 1.28
squared form (LFPRCH2). VIFs and correlation coefficients SNONVOL 42.26 32.01 51.18
(included in the appendix) are calculated at the estimation LQNONVOL 1.02 0.81 1.22
stage to verify that there is no substantial presence of multi- OPENNESS 6.80 0.76 25.64
collinearity among the variables. Similarly, a high level of RPCGDP 45,654 28,956 71,047
POPGROW 1.05 −5.99 11.58
unemployment in the previous period suggests slack in the
LFPRCH2 1.07 0 15.51
labor market that could affect a state’s capacity for increas-
UNEMPLAG 5.73 2.3 13.7
ing employment, so the unemployment rate is entered with a
UNION 11.3 2.3 26.1
1-year lag (UNEMPLAG). In earlier iterations, median age
and educational attainment were included to account for Note. EMPGROW = The percentage change in state wage and salary
variation in labor characteristics; however, their contribution employment from previous year, 2000 to 2013; HHI = Herfindahl–
Hirschman Index; SNONVOL = the percentage of state employment
was negligible so they were excluded from the final model.
in nonvolatile industries; SVOL = the percentage of state employment
Finally, UNION is included as a proxy for flexibility in in volatile industries; LQNVOL = location quotient for employment
the labor market and perhaps reflects state policy attitudes in nonvolatile industries; LQVOL = location quotient of employment
toward labor. The literature suggests that the labor policy in volatile industries for a state relative to the nation’s employment in
volatile industries; OPENNESS = state exports as a percentage of state
environment can affect employment, although the evidence gross domestic product; RPCGDP = real per capita gross domestic
is mixed. A high value of UNION suggests that a state’s poli- product; POPGROW = state population growth from previous year;
cies are more sympathetic to labor concerns (more regula- LFPRCH2 = percentage change in the labor force participation rate from
tion) and/or that the state’s labor market might be relatively previous year, both sexes, squared; UNEMPLAG = state unemployment
rate lagged 1 year; UNION = percentage of employed persons who are
inflexible. The expectation is that, other things being equal, a union members, by state.
higher percentage of union membership will have a con-
straining, or at least stabilizing, effect on employment.
Annual dummy variables are included to account for national The second model is expressed in the equation below and
influences on state growth. As mentioned above, the period it uses employment location quotients on volatile and non-
under study includes two recessionary periods. The results on volatile industries to explain the variation in employment
the annual dummies are expected to mirror the national business growth.
cycle. Similarly, the model is estimated using cross-section Model 2:
fixed effects to account for state-specific but unobserved phe-
nomena to include possible spatial effects. Table 3 provides EMPGROWit = ϕ1HHI it + ϕ2 LQNVOLit + ϕ3 LQVOLit
descriptive statistics of the continuous variables. +ϕ4OPENNESSit + ϕ5 RPCGDPit + ϕ6 POPGROWit
+ϕ7 LFPRCH 2it + ϕ8UNEMPLAGit + ϕ9UNIONREPIT
Model +ϕ10YEAR2001 +  + ϕ22YEAR2013 + uit .
The model is designed to explain state-by-state variation in
annual employment growth rates. The intention is to ask Method
whether state industrial concentration, relative reliance on Initial diagnostics indicated serially correlated errors over
volatile or nonvolatile industrial sectors, and/or export expo- more than one lagged period. The model was estimated
sure has statistically detectable relationships with annual using the Park–Kmenta method (Kmenta, 1986) as pro-
employment growth and, if so, to reveal the direction of the grammed in Shazam Econometrics Software (Whistler,
influence. The first model is expressed in the equation below. White, Wong, & Bates, 2004). This is a generalized least
Model 1 uses the share of volatile and nonvolatile industries squares method that corrects for both cross-sectional het-
to explain the variation of employment growth. The sub- eroscedasticity and time-wise autoregression. In this case,
scripts identify statei and timet. it is thought to be a better method than making a simple
Model 1: AR(1) correction. Year dummy variables are included to
EMPGROWit = β1HHI it + β 2 SNONVOLit + β3 SVOLit account for national-level influences. The model is esti-
mated twice, once using the five most and least volatile
+ β 4OPENNESSit + β5 RPCGDPit + β 6 POPGROWit
industries for SVOL and SNONVOL, and once with
+ β 7 LFPRCH 2it + β8UNEMPLAGit + β9UNIONREPIT employment location quotients in the five most and least
+ β10YEAR2001 +  + β 22YEAR2013 + eit . volatile industries (LQVOL and LQNVOL). Both model
Pallares and Adkisson 7

Table 4.  Estimation Results.

First model coefficient (t- Second model coefficient (t-

ratio), VIF ratio), VIF
HHI 0.018 (3.83)***, 1.96 0.019 (4.47)***, 1.81
SVOL −0.161 (−2.65)***, 2.50 —
SNONVOL −0.527 (−7.25)***, 1.29 —
LQVOL — 0.217 (0.27), 2.04
LQNVOL — −12.301 (−5.91)***, 1.40
OPENNESS 0.118 (5.31)***, 1.38 0.133 (5.79)***, 1.40
RPCGDP 0.916 × 10−04 (4.72)***, 1.61 0.842 × 10−04 (4.27)***, 1.61
POPGROW 0.458 (7.96)***, 2.27 0.458 (7.84)***, 2.17
LFPRCH2 −0.057 (−4.01)***, 1.09 −0.060 (−4.12)***, 1.09
UNEMPLAG 0.188 (4.89)***, 3.57 0.264 (6.67)***, 3.44
UNION −0.055 (−2.25)**, 1.78 −0.043 (−1.74)*, 1.92
R2 .8735 .8818

Note. VIF = Variance inflation factor; HHI = Herfindahl–Hirschman Index; SNONVOL = the percentage of state employment in nonvolatile industries;
SVOL = the percentage of state employment in volatile industries; LQNVOL = location quotient for employment in nonvolatile industries; LQVOL =
location quotient of employment in volatile industries for a state relative to the nation’s employment in volatile industries. OPENNESS = state exports as
a percentage of state gross domestic product; RPCGDP = real per capita gross domestic product; POPGROW = state population growth from previous
year; LFPRCH2 = percentage change in the labor force participation rate from previous year, both sexes, squared; UNEMPLAG = state unemployment
rate lagged 1 year; UNION = percentage of employed persons who are union members, by state; EMPGROW = percentage change in state wage and
salary employment from previous year, 2000 to 2013. Dependent variable = EMPGROW; pooled data, 50 states, 2000-2013, n = 700, df = 626, with
cross-section and time fixed effects.
*Indicates statistical significance with at least 90% confidence. **Indicates statistical significance with at least 95% confidence. ***Indicates statistical
significance with at least 99% confidence.

specifications tell the same story. Specific interpretations
are based on the first model.
Results
The first four results reported in Table 4 provide the esti-
mated relationships for the primary variables of interest,
HHI, SNONVOL, SVOL, and OPENNESS. The four vari-
ables, HHI, SVOL, SNONVOL and OPENNESS, show sta-
tistically detectable relationships with EMPGROW. HHI
exhibited a positive relationship to employment growth, sug-
gesting that the concentration of state employment in a few
industries (regardless of whether these industries are volatile
or nonvolatile) tended to increase employment growth.
The sign on the estimated coefficient for SVOL suggests
that reliance employment on volatile industries had a nega-
tive influence on EMPGROW. The coefficient suggests that
a one percentage point increase in the share of state employ-
ment in volatile industries reduced employment growth by
0.16 percentage point. This coefficient indicates that concen-
tration in employment on volatile industries tended to reduce
employment growth.
The share of nonvolatile industries (SNONVOL) had a
negative relationship with the dependent variable. This
implies that, by itself, a purposeful policy of promoting
employment in nonvolatile industries will have a negative
impact on state employment growth as suggested by Malizia
and Ke (1993). A one percentage point increase in a state’s
share of employment in nonvolatile industries relates to a
0.527 percentage point decrease in annual employment
growth. By comparing the coefficients of SVOL and
SNONVOL, the results suggest that concentration in both
volatile and nonvolatile industries reduced employment
growth, but that SNONVOL had a greater negative impact
on employment growth than SVOL.
The relationship between export openness (OPENNESS)
and employment growth (EMPGROW) is statistically detect-
able. The sign and size of the coefficient suggest that a state’s
employment growth rate would increase slightly if it
increased its export exposure. By the five-industry estimate,
a one percentage point increase in export share relates to a
0.118 percentage point increase in employment growth. The
results suggest that exports add a dynamic aspect to a state’s
economy.
All control variables had detectable influences that pro-
vide insights into employment growth. The estimated coef-
ficient on real per capita gross domestic product (RPCGDP)
is positive and statistically significant. As one might expect,
higher income invites higher rates of employment growth.
Demographic and labor force changes seem to have some
short-term influence on employment growth. Population
growth (POPGROW) showed a positive and statistically
detectable relationship with EMPGROW. A one percentage
point increase in population is associated with a 0.458 per-
centage point increase in employment, though a decrease in
the share of the population that is employed. The relationship
between EMPGROW and the change in labor force partici-
pation is parabolic and statistically detectable, this time with
8 Economic Development Quarterly 00(0)
Figure 3.  Yearly dummy values, share model.
Note. Omitted year is 2000.
a maximum value of EMPGROW at LFPRCH2 = zero. In
this model, as the labor force participation rate grows, state
employment growth rates decrease at an increasing rate. This
finding suggests that, other things equal, increasing the labor
force participation alone may be insufficient to support
employment growth.
As expected, the one-period lagged unemployment rate
(UNEMPLAG) showed a positive and statistically detectable
relationship with employment growth. High unemployment in
the previous year seemed to help drive current-year employ-
ment growth. The model predicts that a one percentage point
increase in the previous year’s unemployment rate will
increase current-year employment growth by 0.188 percent-
age point. As discussed above, unemployment may represent a
readily available workforce to support employment growth.
Union membership (UNION) had a negative and statisti-
cally detectable relationship with EMPGROW. As union
membership increases, employment growth decreases. One
interpretation of this result is that unionization constrains the
labor market and thus retards employment growth. Another
possible interpretation is that unions bring stability to state
employment by making it harder to hire and fire employees.
The model predicts that a one percentage point increase in
union membership relates to a 0.055 percentage point
decrease in state employment growth; thus, the impact on
employment growth, while detectable, is small.
The results on the annual dummy variables are omitted
from Table 4. As expected, the results mirror the national
business cycle. The coefficients are statistically significant in
all 13 years. The national business cycle has important
impacts on state employment growth. Figure 3 provides a
graphical depiction of the annual intercept changes revealed
by the year dummy variable estimates.
Finally, the second model incorporates location quotients
in the volatile and nonvolatile industries to measure the reli-
ance in employment on those industries relative to the nation.
The results on the second model imitate the results of the first
model in terms of hypothesized sign and statistical relevance
in all instances except on the LQNVOL, which carries no
statistically detectable relation to EMPGROW. Besides this,
to test for robustness, the models were reestimated dropping
the HHI on both, which had neither significant difference in
the signs of the coefficients nor the statistical influence of the
variables. The VIFs have values that are well below five,
indicating that multicollinearity is minimal.
Discussion and Conclusions
This study opened by asking whether a lack of diversity in
employment, proxied by concentration in volatile industries,
reliance on exports, and general industrial concentration,
affects employment growth. Based on the first model analy-
sis described above, the answer is yes, though perhaps in
unexpected ways. General industrial concentration (HHI) is
positively related to employment growth. Employment
intensity in volatile industries (SVOL) seemed to have a neg-
ative influence on employment growth. Employment inten-
sity in nonvolatile industries (SNONVOL) also seems to
retard employment growth somewhat. Export intensity
(OPENNESS) has a slightly positive impact on employment
growth. Given these results, economic development policies
aimed specifically at attracting stable industries may be
counterproductive if the goal is high rates of employment
growth. On the other hand, to focus on either avoiding or
attracting volatile industries would likely have a small or
neutral impact on employment growth. Increasing employ-
ment in export industries may provide a small boost to
employment growth.
Population growth (POPGROW) relates positively to
employment growth as does the lagged value of unemploy-
ment (UNEMPLAG). Together these findings hint that, for
employment to grow, there needs to be a supply of new and
Pallares and Adkisson 9

resident workers available to take advantage of employment
opportunities when they arise. Conversely, growth in labor
force participation (LFPRCH2) is negatively related to
employment growth, suggesting that relying solely on new
entrants to the labor force to fill new jobs constrains employ-
ment growth. Union membership (UNION) put a slight
damper on state employment growth.
As a robustness check, the second model replaces
industry shares, SVOL and SNONVOL, with LQVOL and
LQNVOL, alternative measures of state reliance on either
volatile or nonvolatile industries. The interpretations
immediately above hold with one exception. Where
SVOL, the share of employment in volatile industries,
indicated a statistically detectably negative relationship
with employment growth, LQVOL, the location quotient
for volatile industries, lacks statistical influence, some-
what clouding the conclusion above that employment
intensity in volatile industries (SVOL) has a negative
influence on employment growth. The fact that no other
conclusions changed suggests the findings on the other
variables to be robust.
Finally, the national business cycle (measured using year
dummy variables) has a strong influence on state employ-
ment growth. This suggests that states will be limited in their
ability to maintain an employment growth trend that runs
counter to national trends.

Appendix
Table A1.  Correlation Coefficients.
EMPGROW HHI SVOL5 SNVOL5 LQVOL5 LQNVOL5 OPENNESS RPCGDP POPGROW LFPRCH2 UNEMPLAG UNION

EMPGROW 1.00  
HHI 0.07 1.00  
SVOL5 −0.01 −0.62 1.00  
SNVOL5 0.01 0.24 −0.31 1.00  
LQVOL5 −0.09 −0.56 0.81 −0.23 1.00  
LQNVOL5 0.11 0.21 −0.36 0.89 −0.29 1.00  
OPENNESS 0.03 −0.19 0.21 −0.16 0.36 −0.17 1.00  
RPCGDP 0.11 0.18 −0.22 −0.11 −0.23 −0.09 −0.06 1.00  
POPGROW 0.37 0.18 0.01 −0.09 −0.16 0.02 −0.09 0.02 1.00  
LFPRCH2 −0.21 0.11 −0.08 −0.03 −0.02 0.00 0.09 −0.08 −0.03 1.00  
UNEMP LAG −0.04 0.18 −0.29 −0.13 −0.01 −0.18 0.33 −0.04 −0.26 0.19 1.00  
UNION −0.08 0.02 −0.15 −0.17 −0.28 −0.25 −0.07 0.44 −0.16 −0.06 0.06 1.00

Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect
to the research, authorship, and/or publication of this article.
Funding
The authors received no financial support for the research, author-
ship, and/or publication of this article.
Notes
1. In this study, the focus is on wage and salary employment.
According to the Bureau of Economic Analysis, wage and sal-
ary employment measures the average annual number of full-
time and part-time jobs in each area by place of work. All jobs
for which wages and salaries are paid are counted. Although
compensation paid to jurors, expert legal witnesses, prison-
ers, and justices of the peace (for marriage fees) is counted
in wages and salaries, these activities are not counted as jobs
in wage and salary employment. Corporate directorships are
counted as self-employment.
2. With 14 years, 20 industries, and 50 states there are potentially
14,000 individual observations of wage and salary employ-
ment. Of the 14,000 possible, 58 variable observations were
missing. Rather than eliminate states based on this small
amount of missing data, estimated values based on linear
extrapolations from available data were entered. Any bias
caused by this choice should be insignificant. This affeccts the
variables EMPGROW, LQVOL, LQNVOL, HHI, SVOL, and
SNONVOL.
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Author Biographies
Francisco J. Pallares is an associate professor of economics at
Austin Community College. He earned his Doctor of Economic
Development degree from New Mexico State University and his
Master of Science degree in economics from the University of
Texas, El Paso.
Richard V. Adkisson is a professor of economics and the Garrey
E. and Katherine T. Carruthers Endowed Chair in Economic
Development at New Mexico State University. He earned his PhD
in economics at the University of Nebraska, Lincoln.