What Is Location Quotient?
A location quotient (LQ) is a statistical measure used in regional economics to quantify the concentration of a particular industry, occupation, or demographic characteristic within a specific geographic area compared to a larger reference area, typically the nation. It serves as an economic indicator that helps identify regional specializations or unique economic strengths. When a region has a location quotient greater than one for a given sector, it suggests that the region has a higher proportion of employment or economic activity in that sector than the national average, indicating a degree of specialization.39, 40, 41, 42 Conversely, a location quotient less than one implies a lower concentration, while a value of one suggests the regional share matches the national share.
History and Origin
The concept of the location quotient emerged from early efforts in economic analysis to understand regional economic structures. It was initially developed by economist Robert Murray Haig in the late 1920s as part of his pioneering work on economic base theory.38 Haig's economic base theory posited that a region's economy could be divided into two sectors: a "basic" sector that exports goods and services outside the region, and a "non-basic" sector that serves local demand. The location quotient became a key tool for identifying these export-oriented industries, which were considered drivers of regional economic growth.37 Its systematic application in urban and regional economic development studies gained traction from the 1940s onwards.36
Key Takeaways
- A location quotient (LQ) measures the relative concentration of an industry or occupation in a specific region compared to a larger area, typically the nation.
- An LQ greater than 1 indicates a higher concentration, suggesting regional specialization in that sector.
- LQs are valuable tools for regional planning, economic development, and workforce planning, helping identify unique economic strengths.
- They can help identify "export" industries that produce more than local needs, contributing to regional wealth.
- While useful, LQs should be used in conjunction with other data analysis tools and consider factors like industry size and stability.
Formula and Calculation
The location quotient is calculated by comparing a region's share of total employment (or other economic indicators like earnings) in a specific industry to the national share of employment in that same industry.34, 35
The general formula for the location quotient (LQ) is:
Where:
- ( E_{i,r} ) = Employment in industry i in region r
- ( E_{t,r} ) = Total employment in region r
- ( E_{i,n} ) = Employment in industry i in the nation n
- ( E_{t,n} ) = Total employment in the nation n
This formula essentially divides the local industry's percentage of regional employment by the national industry's percentage of national employment.32, 33
Interpreting the Location Quotient
Interpreting the location quotient provides insights into a region's economic structure and its potential for competitive advantage.
- LQ = 1.0: This indicates that the region's concentration in a particular industry or occupation is proportional to the national average. The region is self-sufficient in meeting its demand for the goods and services produced by that sector.29, 30, 31
- LQ > 1.0: A location quotient greater than one signifies that the region has a higher concentration of the industry or occupation than the national average. This suggests a regional specialization and often implies that the region produces more than its local needs, making it an "export" industry that sells outside the region. For instance, an LQ of 2.0 means the concentration is twice the national average.25, 26, 27, 28
- LQ < 1.0: A location quotient less than one indicates a lower concentration compared to the national average. This suggests the region is not specialized in that sector and may "import" goods or services from other regions to meet local supply and demand.23, 24
While an LQ greater than 1.0 generally suggests an export industry, some analysts use higher thresholds, such as 1.25 or 2.0, to define significant specialization or "clusters."20, 21, 22
Hypothetical Example
Consider the fictional city of "Techville" and its software development industry. We want to calculate Techville's location quotient for software development.
Suppose:
- Total employment in Techville: 1,000,000 jobs
- Employment in software development in Techville: 50,000 jobs
- Total employment in the Nation: 150,000,000 jobs
- Employment in software development in the Nation: 3,000,000 jobs
First, calculate the local concentration:
Local Concentration = (50,000 / 1,000,000) = 0.05 (or 5%)
Next, calculate the national concentration:
National Concentration = (3,000,000 / 150,000,000) = 0.02 (or 2%)
Finally, calculate the location quotient:
Location Quotient = Local Concentration / National Concentration
LQ = 0.05 / 0.02 = 2.5
In this example, Techville has a location quotient of 2.5 for software development. This indicates that the software development industry in Techville is 2.5 times more concentrated than the national average, highlighting it as a significant hub for this sector.
Practical Applications
Location quotients are widely used by economists, regional planning professionals, and policymakers for various purposes:
- Identifying Economic Strengths: LQs help pinpoint industries or occupations where a region has a unique specialization or competitive advantage. This information can be crucial for targeted economic development initiatives, attracting businesses, and fostering growth in specific sectors.17, 18, 19
- Workforce Development: By understanding areas of occupational concentration, regions can tailor educational and training programs to meet the needs of their key industries, ensuring a skilled labor force.16 The U.S. Bureau of Labor Statistics (BLS) frequently provides location quotient data for industries and occupations, aiding such analyses.14, 15
- Market Analysis and Forecasting: LQs can be used in market analysis to assess the underlying economic health of a region and predict future trends. For example, a high location quotient in a growing national industry might signal strong regional growth potential.12, 13
- Targeting Investment: Investors and businesses can use LQs to identify regions with specialized industries that might offer unique opportunities or a supportive ecosystem.
Limitations and Criticisms
While a valuable tool in regional economics, the location quotient has certain limitations and should not be used in isolation.
- Assumptions: The calculation of a location quotient relies on certain assumptions, such as identical production technologies and consumer preferences between the local region and the nation.11 Deviations from these assumptions can affect the accuracy of the LQ as an indicator of self-sufficiency or export activity.
- Data Aggregation: LQs are often based on aggregated data, which might mask internal variations within industries or regions. A high LQ for a broad industry may not reflect the nuances of specific sub-sectors.
- Small Region Volatility: For very small regions, the addition or removal of even a few establishments or jobs can dramatically alter the location quotient, leading to potentially misleading interpretations of specialization.10
- Lack of Causal Link: A high LQ indicates concentration but does not directly explain why that concentration exists (e.g., due to natural resources, historical development, or policy). It also doesn't inherently imply that the excess production is necessarily exported or that the industry is a primary driver of economic growth. Researchers from the Federal Reserve Board have highlighted the pitfalls of relying solely on LQs to identify industry clusters, particularly in smaller areas.9
Therefore, LQs are best used as a starting point for deeper economic analysis, complemented by other qualitative and quantitative data.
Location Quotient vs. Industrial Specialization
The terms "location quotient" and "industrial specialization" are closely related but not interchangeable. A location quotient is a measure or statistical tool used to quantify industrial specialization. Industrial specialization, on the other hand, is the economic phenomenon itself, referring to the degree to which a region's economy is focused on a particular industry or set of industries.
| Feature | Location Quotient | Industrial Specialization |
|---|---|---|
| Nature | A quantitative ratio or economic indicator. | A qualitative and quantitative characteristic of an economy. |
| Purpose | To measure the relative concentration of an industry. | To describe an economy's focus on certain sectors. |
| Result | A numerical value (e.g., 1.5, 0.8). | The state of having a disproportionate focus on an industry. |
| Relationship | An LQ value greater than 1 indicates a region's industrial specialization. | The phenomenon that an LQ helps identify and quantify. |
In essence, a high location quotient serves as evidence of industrial specialization within a region.
FAQs
What does a location quotient tell me?
A location quotient tells you how concentrated an industry or occupation is in a specific area compared to the national average. If the number is greater than 1, the area has a higher concentration and is considered specialized in that sector.7, 8
Why is location quotient important for economic development?
The location quotient is important for economic development because it helps policymakers and planners identify a region's unique economic strengths and "export" industries. This understanding allows them to focus resources, attract businesses, and tailor workforce development programs to maximize regional economic growth.5, 6
Can location quotients be calculated for anything other than employment?
Yes, while employment is the most common variable, location quotients can also be calculated using other economic statistics such as earnings, wages, or gross domestic product (GDP) for a particular industry or sector.4 The methodology remains the same: comparing a local share to a national share.
What are the main limitations of using a location quotient?
Main limitations include its reliance on assumptions about production and consumption similarities between regions and the nation, its sensitivity to small changes in very small regions, and its nature as an indicator rather than a causal explanation. It's a useful tool but should be part of a broader data analysis effort.2, 3
How is location quotient different from market share?
Location quotient measures the relative concentration of an industry or occupation within a region's economy compared to a larger economy.1 Market share, on the other hand, typically refers to the percentage of total sales or revenue that a specific company or product holds within its defined market. While both involve proportions, location quotient focuses on regional economic structure, whereas market share focuses on competitive standing within a commercial market.