Shift-Share Analysis: Determine the Competitiveness of an Industry

Components of shift-share analysis

The shift-share analysis consists of four main parts: national growth effect, industrial mix effect, expected change, and competitive effect.

Each of them will be discussed in greater detail below.

National growth effect

The national growth part helps you visualize the national trend. It determines the change of growth in a specific region in comparison with the nation-wide growth numbers. Let's say the national US economy showed a 5% YoY growth. Consequently, the specific region should grow at the same rate. The national growth component is the base for all further calculations.

Industrial mix effect

An industrial mix effect is an approach that helps you see which industries outgrew the overall national economy average and which industries lagged behind. Some industries grow faster than others and the industrial mix effect allows you to identify those industries. 

You can calculate the industrial mix effect by multiplying the base year employment by the difference between the national growth rate for that specific sector and the overall national average rate.

For example, let's say that the national growth rate of a selected industry is 7%. The national economic growth is 5%. Subtracting the particular industry growth rate from the national levels equals 2%. It means that 2% of the growth can be attributed to the industry growth alone, aside from the national growth rate. As a result, the industrial mix effect is equal to 2%.

Expected change

The expected change is the rate of growth you expect to see for a specific industry based on the national growth effect and the industry mix effect discussed earlier. Any changes beyond those calculations are considered unexpected. Unexpected changes are allocated to the specific region's competitive effect which will be explained next. To calculate expected change, you need to combine national growth with the industrial mix effect. Referring to the examples and numbers above, the computation is as follows: 5%+2%=7%. The expected change, therefore, is 7%.

Competitive effect

Some regions have unique competitive advantages that allow the industry to outperform national economic growth trends. It shows that there are certain unique circumstances about that specific region that allows for a competitive advantage in the industry. The competitive effect refers to the unique circumstances around those changes. Regional competitive effects can be impacted by geographical and demographical factors, among others.

For example, let's say that the national economic growth rate is 5%. The national industry growth rate is 11%. After applying the deduction, you can see that 6% of the growth is assigned exclusively to the industry. At this point, you have the national level of growth and can move on to the regional economy. If you take the same industry and check its growth in a certain local economy, you may find that the industry there grew at a rate of 15%. You do the math, deduct the 5% growth of the overall national economic growth, and you see that the growth of the industry in the selected region is 10%. It's 4% higher than the national industry growth. Now you can draw a conclusion that the specific region provides a positive competitive effect for that particular industry.

There are two types of regional industries: leading and lagging. Leading industries are those that outperform the national industry growth metrics. In contrast, lagging industries are those that underperform.

The key takeaway here is that identifying industries that have a competitive advantage in certain regions could help investors recognize specific factors that could affect their chances of success. Furthermore, diversifying your investments in leading industries is a better business decision, and shift-share analysis allows you to do that. However, you may want to jumpstart economic development in an underperforming region, and shift-share analysis also allows you to identify a lagging regional industry.

How to use shift-share analysis

Shift-share analysis provides a lens through which the distinctiveness of a regional economy can be viewed. This method is adept at highlighting changes in job growth within specific industries of a region, offering insights into the competitive advantages present. However, it's crucial to understand both its capabilities and its limitations.

Understanding the Basics

• Job Growth vs. Total Jobs: Shift-share analysis focuses on the dynamics of job growth rather than providing a snapshot of the total number of jobs across an industry. This distinction is important for identifying industries where a region has competitive strengths.
• Competitive Industries Identification: By comparing regional industry growth to national trends, shift-share analysis pinpoints sectors where a region outperforms or underperforms, shedding light on competitive advantages or disadvantages.

Limitations and Considerations

• Lack of Underlying Reasons: While shift-share analysis reveals which industries are competitive, it doesn't delve into the 'why.' Understanding the factors driving competitiveness requires deeper investigation by analysts familiar with the unique aspects of the region in question.
• Risk of Misinterpretation: It's easy to misinterpret high performance in a regional industry as a sign of overall health. However, if national growth rates for that industry are even higher, the region might actually be falling behind. Similarly, an industry's slow decline in a region could be misleadingly positive if the national trend is a faster decline.

Practical Applications

• Real-World Insight: Shift-share analysis helps avoid misconceptions by providing a grounded perspective on industry performance. For instance:An industry might appear to excel regionally but actually lags behind national growth trends.Conversely, a regionally declining industry could be outperforming the national decline, indicating relative resilience.A discrepancy between national growth and regional decline in an industry signals a critical competitive disadvantage, warranting further analysis to devise strategic responses.

Data for shift-share analysis

Successfully implementing shift-share analysis hinges on the availability of precise data. At the core of this analysis is annual employment data, which is essential for assessing industry and regional economic shifts. This data can typically be sourced from public government resources available online, offering a wealth of information for analysis. However, the one downside is collecting it. Gathering data manually takes quite the amount of time that could instead be used to perform analysis.

Streamlining Data Acquisition:

To mitigate the time spent on data collection, leveraging services from a public web data provider, like Coresignal, can be a game-changer. Coresignal's firmographic data allows for the categorization of businesses by various unique identifiers, such as size, industry, and location. This segmentation facilitates a targeted approach to data analysis.

• Enhanced Employment Data Tracking: Additionally, Coresignal offers an employee headcount dataset, enabling the tracking of employment changes with ease. This feature is invaluable for identifying trends and shifts within specific companies or industries.
• Benefits of Using Coresignal:
• Efficiency: Obtain data quickly and conveniently, bypassing the laborious process of manual collection.Relevance: With constantly updated datasets, Coresignal ensures the data remains fresh, relevant, and accurate.

By integrating data from sources like Coresignal, analysts can significantly streamline the preparatory phase of shift-share analysis, allowing more time to be dedicated to interpreting the data and deriving meaningful insights.

Conclusion

The shift-share analysis allows you to gain deeper insights into the local economy and perform regional analysis. You can calculate the regional growth or decline to see whether the industry outperformed national metrics. You can track economic change and industry trends to improve your knowledge and make informed decisions.

The shift-share analysis is an extremely useful tool for investors, economists, and other analysts that require comparative knowledge for research or to make business decisions.