Analyzing Economic Base and Employment Through a Different Lens | submitted by Michael Gay

A discussion surrounding a job has probably hit just about every other dinner table in Madison or this country sometime in the last year. Really, very few families don’t know someone that has been affected by changes in employment. A job for most in this world is the key to self worth, owning a home, supporting a family, entertainment, education, and health insurance, among other things.

Jobs are created by organizations (government, academia, etc) and entrepreneurs (companies). Over the years, with the increase in accessible data, economic developers have found many ways to analyze employers and the employment opportunities they create. Lately, we have centered on “industry clusters” as a way to build specialized, focused, and sometimes global economies with family-supporting income wage jobs.

MG&E, for instance, has done an excellent job the last 15 years profiling hi-tech industry clusters of Greater Madison in their hi-tech directory. The directory compliments and further explains the U.S. Census data that we receive from the federal government.

Thrive, as another example, has focused their efforts on agriculture, biotechnology, and health care industry sectors.

Recently, I had the chance to learn more about the Edward Lowe Foundation’s mission and principal focus for economic base analysis. Edward Lowe, for business historians, was the inventor of kitty litter. His foundation, created with kitty litter millions and located in Cassopolis Michigan, focuses on building local economies through expansion of “second stage” companies and they have created a Web page to justify their belief system.

I am told that this data, in its specialized packaged form, is not available elsewhere, including the federal government. That said, it is derived from federal NAICs (North American Industry Classification codes) public data, but it is reconfigured by a Stanford economist for the purpose of looking at second stage companies in every state, county, and MSA (metropolitan statistic area) in this country.

Its findings tell the following story.

Rather than assess economies by types of industries, this database assesses by size of companies in terms of sales and jobs. Second stage companies are generally those businesses across all industry sectors that are between $1 million to $100 million in revenues and 10-100 employees. The reason for this focus, as documented by the data, is the job creation history and potential that comes from companies in this second stage of existence.

Logically, from a pure establishment (aka number of companies) point of view, there are more companies of the micro- and small-sized companies (first stage companies) than second, third and fourth stages combined. But the data suggests even though second stage companies are only 10-15% of the total number of companies in Madison MSA and State of Wisconsin, they are responsible for 35-40% of all the jobs.

The same is true with time series data available covering the 1993-2007. In crunching the foundations numbers for the Madison MSA for 2005-2007, second stage companies comprised 10% of the new establishments created 40% of the jobs. One can point out that this job growth occurred during a booming economy, but second stage companies grew by 38% during the three years and created nearly twice the employment opportunities than any other stage company.

Takeaways:

Tom Still was spot on last week when he penned his article about making lemonade out of the lost four-stage opportunity (GM) by the state investing the millions earmarked for that project in non-fourth stage companies.

Secondly, since Edward Lowe’s data does not look at wages for second stage employment growth, the data is incomplete. That said, when the datasets for “sectors” and “rankings” are posted, the picture may become a bit clearer.

Another key takeaway is that not all jobs that we as a community seek to retain and create (and sometimes invest in) need to be targeted to hi-tech industries. Don’t get me wrong, hi-tech establishment and employment sector growth bring huge short and long-term benefits to the city, region and state. But there are tons of entrepreneurs creating value-added products, services, and jobs in traditional industries that are not as glamorous as hi-tech but provide value, employment, livelihoods and enhance our local economy and desire to support basic industry sectors.

Lastly, the data that is available for second-stage analysis only goes down to the level of MSA or county. Though the city firmly embraced regionalism before the formation of Thrive as this region’s economic development entity, it would be nice to have data at the city level to drive our own local public policies and decision making. But unlike other communities in this nation, probably most of the major ones, Madison does not permit its businesses locally. So we will never know.