Diversity in regional economies in QLD and NSW

Posted on November 18, 2019 by Pete Faulkner - Cairns, Jobs, NSW, QLD, Uncategorized

Last week at the launch of the Invest Cairns initiative from The Cairns Post and Advance Cairns the issue of economic diversity, and in particular the diversity of the Cairns economy, was a major topic of conversation. My presentation at the launch presented some clear evidence that the Cairns economy had diversified over the past decade but it got me thinking about how we might better compare diversity across all of Queensland’s regions and provide some historic context.

In considering that problem I came across a number of papers which utilised the Hachman Index as a measure of regional economic diversity. The Hachman Index (developed by Frank Hachman from the Bureau of Economic Research at the University of Utah in 1995) uses the largest geographic area as a reference region and assumes this region (e.g., Australia) is the most economically diverse. The Index calculates how similar the subject region’s employment distribution is to that of the reference region. The maximum value for the Index is 1.0 (meaning the subject region’s employment make-up is identical to the reference area); the higher the Index the more alike to the reference area, and therefore the more diverse, is the region’s employment distribution.

The calculation is noted below. We have used SA4 regions as subject areas and Australia as the reference area.

Although at the national level the ABS provide quarterly Trend Industry Employment data, they only provide unadjusted annual averages at the regional level. We have therefore utilised the Conus Trend Industry Employment data for the SA4 regions. Having completed the analysis for all QLD and NSW SA4 regions as at August 2019 we present below the results (as annual averages) of the Hachman Index scores for all the SA4 regions (as well as Capital and Rest of State areas).

Cairns ranks as the most diverse of all the non-Greater Brisbane regions in Queensland while the Illawarra takes the crown in NSW.

Areas with particularly low scores, such as Mackay and Darling Downs-Maranoa, demonstrate employment distributions which are signifcantly less diverse than Australia as a whole. In the case of Mackay for instance this stems largely from the fact that Mining makes up only 1.8% of employment across the nation but accounts for 18.9% in Mackay….such a large variation in an industry that is relatively so important in the subject region has a large negative effect on the Index. Likewise, in the Darling Downs-Maranoa Agriculture accounts for 22.1% of total employment and yet makes up just 2.5% across the nation. A similar picture is seen in Queensland-Outback.

Sydney-City and Inner South scores quite low due to the high concentration of Professional Services (50.8% versus 9.0% nationally) and Finance & Insurance (13.8% versus 3.4% nationally) employment. Similar issues apply to Brisbane-Inner City where Finance, Professional Services and Public Administration jobs are heavily over-represented.

While this anlaysis helps us to get a handle on the diversity, or otherwise, of these regions we need to acknowledge that there are shortcomings with this methodology. Not least of which is that it does not account for any potential competitive advantages of a region. A region may have an advantage specialising in a specific industry, making a concentration in that industry economically justifiable over a more diversified economy (Mackay would be a good example here). It’s not true to suggest that an employment distribution similar to the nation’s is necessarily ‘better’ or ‘worse’. However, over time, it is generally accepted that increased diversity is a positive attribute for an economy.

This idea of changes over time is also an interesting topic for further discussion. Looking at the historical record for Cairns we see a direct link between employment diversity and the overall performance of the regional economy. During the post-GFC slow down (and recession throughout 2009, 2010 and 2011) there is clear evidence of a decrease in diversity. Once the economy began to recover we have witnessed an equally clear increase in diversity; which takes us to where the region now sits as the most diverse regional economy in Queensland. When the GFC hit, and the effect was compounded in Cairns by the collapse of Japanese visitors to the region as that country went through a decade-long recession, we can see that diversity was not all that much lower than currently. It is to be hoped that the current trend towards further diversification, and the fact that much has already been achieved, will help to insulate the Cairns economy, at least to some extent, from the worst effects of such an exogenous shock in the future.

Futher details of this analysis can be obtained by contacting Pete Faulkner.

We should note that the Regional Australia Institute InSight product also provides diversity measures using the Hachman Index methodolgy. Their data covers Regional Development Areas (rather than the ABS SA4 regions) as well as Local Government Areas but is based on 2016 Census data. While full acess via InSight Premium is a subscription service, there is basic information available freely at their website.