Industry Diversification Project

Beginning in the first quarter of 2016, the Regional Economic Research Institute designed the FGCU Industry Diversification Index. The goal of the IDI is to measure industry diversification and, by extension, that of the workforce, in each of Florida’s 24 workforce regions, the state of Florida, and the remaining 49 states. The index measure is computed quarterly, soon after the release of workforce data from the Florida Department of Economic Opportunity’s Quarterly Census of Employment and Wages. It spans from 0 to 10, with 0 signifying no diversification (or an economy characterized by a single industry), and 10 signifying perfect diversification (no concentration).

A diversified economy provides many advantages to both producers and consumers who comprise it. In particular, states and regions with diversified economies can weather business cycle downturns and unanticipated supply and demand shocks more easily. An example often cited in the economics literature is that of Texas, which, following the decline in oil prices in 1986, fell into a deep, state-wide recession that underscored the need for economic diversification. Since then, Texas’ economy has undergone significant sectoral shifts making it less dependent on the oil industry, which nonetheless remains an important contributor to gross state product. For more information, see Yücel, Mine K., and Thies, Jackson, “Oil and Gas Rises Again in a Diversified Texas,” Southwest Economy (Dallas: Federal Reserve Bank of Dallas, 2011, pp. 10-13).

Arguably, industry diversification is as much an issue for the Florida economy as it was in Texas 30 years ago. Florida’s comparative advantages as an economic region make it especially amenable to industries serving the retirement and tourist sectors. However, dependence on these sectors can cause it to overheat during periods of business cycle boom and overcorrect during times of business cycle bust. 

Industry diversification also suggests (i) more employment options for workers and (ii) available types of skilled labor for employers.

The unseasoned IDI is calculated using the following formula, which can be interpreted as a Gini Index, i.e., a measurement of how equal the distribution of employment is among the different sectors in a region. The index spans from 0 to 10, with a measure of 0 indicates a completely specialized economy, while 10 indicates an economy that is not concentrated in a particular industry.

Where  is the number of industries,  is the share of employment in industry , and  is the rank of industries by employment share in ascending order. For these rankings, the research team uses data from the Quarterly Census of Employment and Wages (QCEW), a publication by the U.S. Bureau of Labor Statistics. The QCEW provides employment and wage information at a county level and is a widely used data source for reports, presentations and research. Employment information is parsed by the North American Industry Classification System (NAICS), a standard used by various Federal agencies to classify business establishments. For this study, we chose to use NAICS super sectors to analyze the data and calculate the IDI.

Starting in the third quarter of 2022, the research team also began seasonally adjusting the unseasoned IDI data. The purpose of this is to remove any seasonal fluctuations in the IDI and allow the reader to gain a better understanding at the trends seen within MSAs, workforce regions and states. After calculations, all unseasoned IDI values are seasonally adjusted through the use of the X-13ARIMA-SEATS seasonal adjustment software from the U.S. Census Bureau.