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

First of all, shift-share analysis shows the distinctiveness of a regional economy. However, it only highlights the changes in terms of job growth and not the total number of jobs in the whole industry. The share-shift analysis is useful to identify a specific region's competitive industries and note the competitive advantages.

Secondly, it's important to note that shift-share analysis does not tell you the reasons why those specific industries are competitive. It only shows the industry growth rate based on national trends. For further analysis about the reasons for competitiveness, analysts should be involved who know the unique circumstances of that specific region.

You can use shift-share analysis to avoid misinterpretations and see things how they really are. For example, just because an industry is performing very well and is way ahead of every other industry, that does not necessarily mean that it's outperforming national metrics. The national industry growth rate could be substantially higher, resulting in the thriving regional industry actually falling behind the trends. The shift-share analysis is capable of revealing the industry's true colors in terms of growth and employment change.

In contrast, one industry could be slowly declining in a particular region. However, the national economic levels in that particular industry could be declining substantially faster. As a result, the declining regional industry is outperforming the national levels and more effectively preventing job loss.

On the other hand, one industry could be growing nationally while the regional industry crumbles down. That is a clear indication of a severe regional disadvantage and should be examined further to find necessary solutions.

Data for shift-share analysis

In order to implement shift-share analysis, you first need to get your hands on relevant data. For this type of analysis, annual employment data is required which you can access online through government resources. The data is publicly available and ready to analyze. However, the one downside is collecting it. Gathering data manually takes quite the amount of time that could instead be used to perform analysis.

To prevent the time lost on collecting relevant data, you could confide in an alternative data provider such as Coresignal. With our firmographic data, you can group businesses by unique identifiers such as size, industry, location, and more. Also, with our employee headcount dataset, you can conveniently track the changes in employment. You can find companies and industries that interest you and receive the data quickly and conveniently. The data is constantly updated; therefore, it's always fresh, relevant, and accurate.

Once you have the data, you can proceed to perform the shift-share analysis and gather the insights that are most relevant and needed to you.

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.