The Mid-Valley Economy: What Makes an Economy Resilient?

by Michael Doughty

April 1, 2020

Economic shocks are a reality. These shocks can be caused by human activity, by nature, or by a combination of the two. Unpredictable, disruptive, and costly, they can have enormous impacts on society. This reality begs the question: why do some economies fair better when hit by economic shocks? Economists refer to the relative ability to resist economic shocks as resilience.

The study of economic resilience is fairly new and many of the properties of resilience are as of yet unexplored. Generally, economic resilience is defined as the ability of an economy to both resist an economic shock and to recover from its impact. Several characteristics of economies have been examined for their potential increases to economic resilience such as: economic diversity, the age of a labor force, economic complexity, the education of the labor force, and population density. Of these concepts, three consistently have been linked to economic resilience; economic diversity, the age of the labor force, and economic complexity. While all three have been shown to be important, economic diversity and the age of a labor force have been widely used and are easily calculated metrics. For these reasons, this article will focus on how economic diversity and the age of the labor force relate to economic resilience.

Economic Diversity

Economic diversity addresses the first concept of resilience, the ability to resist a shock. The idea is basically the same as the adage, “Don’t put all your eggs in one basket.” If an economy is diverse, it has robust economic activity in a wide variety of industries. When a shock impacts a subset of those industries, the economy is powered by the others. In other words, if one “basket” drops, you still have unbroken eggs in other baskets.

To measure economic diversity, many economists turn to the Hachman Index. This index compares the ratio of industries in given areas with that of an area that is considered diverse (usually compared by industry employment or industry output). Let’s look at economic diversity in the Mid-Valley using employment data.

The graph below depicts the Hachman Index for each of the four counties in the Mid-Valley, along with the rank of those counties relative to other counties in Oregon (classifying each industry based on the three-digit North American Industrial Classification System). The actual numeric value is less important than the rankings. Three of the four counties in the Mid-Valley are above the median ranking for Oregon. We would expect this relative diversity to soften the effects of economic shocks in these counties compared with lower-ranked counties.
A similar analysis at the state level, using 2017 gross domestic product data from the Bureau of Economic Analysis, was conducted by a research analyst at the Kem C. Gardner Policy Institute. With the United States as the reference area, Oregon ranked 26th out of the 50 states plus the District of Columbia.

Age of the Labor Force

While economic diversity softens the impact of economic shocks, the age of working adults has a more complicated effect. Having a younger labor force seems to lower economic resilience, but having a larger percent of older workers not only lowers the initial impact of a shock, but creates a more robust recovery. Workers’ age may actually be acting as a proxy for experience. Older workers tend to have more experience than younger workers. This experience translates to productivity. During shock-induced downturns, if a company retains more experienced workers, they may be able to maintain productivity with a relatively smaller labor force.

What age groups provide the positive impact associated with resilience? While the exact age is hard to pinpoint, workers in the age range of 45 to 64 have been shown to have the dual positive effect of greater resistance to shocks and faster recoveries. How does the Mid-Valley compare with the rest of Oregon?
Of the four Mid-Valley counties, only Linn County has a share of workers in the 45 to 64 age bracket larger than the United States, and none of the four counties is ranked in the top half of Oregon’s 36 counties. Oregon’s share of workers in this age bracket ranks 38 out of the 50 states. We would expect areas with higher shares of workers in this age bracket, all other factors equal, to be more resistant to economic shocks and rebound more quickly.

Conclusion

Economic resilience can help protect communities from economic shocks. To this end, many policy makers and community developers are taking characteristics of resiliency into consideration when exploring deployment options. As more research is done in this area, more precise and effective strategies will be available to these decision makers.

Resilience in the counties of the Mid-Valley is a mixed bag. While the overall diversity of the four counties should help reduce the initial impact of economic shocks, an increase in the percent of workers ages 45 and over could speed economic recovery. Incorporation of economic resilience strategies by policymakers and developers in the Mid-Valley could help insulate the region from economic shocks.


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