Understanding Location Quotient

Overview

Location Quotient is a tool for regional analysis. Location quotient (LQ) is a valuable way of
quantifying how concentrated a particular industry, cluster, occupation, or demographic
group is in a region as compared to the nation. It can reveal what makes a particular
region “unique” in comparison to the national average.

A location quotient (LQ) is an analytical statistics that measure a region’s industrial

specialization relative to a larger geographic unit (usually the nation).

In more exact terms, location quotient is a ratio that compares a region to a larger reference
region according to some characteristic or asset.

Computation of Location Quotient

An LQ is computed as an industry’s share of a regional total for some economic statistic

(earnings, GDP by metropolitan area, employment, etc.) divided by the industry’s share of
the national total for the same statistic

For example, an LQ of 1.0 in mining means that the region and the nation are equally
specialized in mining; while an LQ of 1.8 means that the region has a higher concentration in
mining than the nation.

Suppose X is the amount of some asset in a region (e.g., manufacturing jobs), and Y is the
total amount of assets of comparable types in the region (e.g., all jobs). X/Y is then the
regional “concentration” of that asset in the region. If X’ and Y’ are similar data points for
some larger reference region (like a state or nation), then the LQ or relative concentration of
that asset in the region compared to the nation is (X/Y) / (X’/Y’).

• The formula can be expressed as:

% of Manufacturing jobs in a region

• LQ =
% of all jobs in a region

• OR

Manufacturing jobs in a region/

All jobs in a region
• LQ=
Manufacturing jobs in country /
All jobs in a country

LQ for Industries and Industry Clusters

Industry LQ is a way of quantifying how “concentrated” an industry is in a region compared
to a larger geographic area, such as the state or nation. The basic uses of industry LQs (and,
by extension, for clusters and occupations as well) include these:

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 • To determine which industries make the regional economy unique.
• To identify the “export orientation” of an industry and identify the most export-
oriented industries in the region.
• To identify emerging export industries beginning to bring money into the region.
• To identify endangered export industries that could erode the region’s economic base.

Industry LQs are calculated by comparing the industry’s share of regional employment with
its share of national employment. Suppose that Mining account for 0.16% of all regional jobs
but only 0.015% of all national jobs. The region’s LQ for Mining would then be (.16 / .015) =
10.67, meaning that Mining is nearly 11 times more concentrated in the region than average.

Location quotient tells a much different story than merely job numbers or job growth.
Industries with high LQ are typically (but not always) export-oriented industries, which are
important because they bring money into the region, rather than simply circulating money
that is already in the region (as most retail stores and restaurants do). Industries which have
both high LQ and relatively high total job numbers typically form a region’s economic base.
Economic developers and government officials need to pay particular attention to these
industries not only for the jobs they provide, but also for their multiplier effect—the jobs they
create in other dependent industries like retail trade and food services.

LQ is augmented by two other pieces of information: size of industry/cluster/occupation in

terms of jobs, and percent change in LQ over a given time period. A high-LQ industry with a
small number of jobs may be an export-oriented industry, but is not vital to the region’s
economy. A large, high-LQ industry with declining LQ over time, however, is endangering
the regional economy.

Consider an example: a city like Detroit, will have high-LQ industries in the manufacturing
sector, specifically industries related to automobile and light truck manufacturing. This
quantifies the well-known fact that automobiles are Detroit’s major export. Because these
industries also have very high total employment, a decline in employment or LQ indicates
trouble for the entire economy. Growing employment paired with declining LQ, however,
merely indicates that the industry is not growing as fast in the region as it is in the national
economy.

LQ for Occupations

LQ for occupations are calculated by dividing the regional concentration of an occupation by

the state or national concentration of that same occupation.

So suppose that Registered Nurses in a region account for 0.10% of all jobs, while in the
nation they account for 0.09% of all jobs.

The LQ of nurses in the region is thus (.1 / .09 = 1.11).

This means that the region has a higher than average concentration of nurses.

High-LQ occupations are important because they are generally employed by high-LQ
industries, which tend to be export-oriented and form the majority of the region’s economic
base.

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LQ for Competencies (Skills, Knowledge, and Abilities)

Competency LQs are calculated using the concentrations of regional occupations that require
those competencies, along with information about what level of competency each occupation
requires.

The level of the competency is added up across all occupations requiring it and weighted by
the regional employment in each occupation.

These LQs can reveal competencies in which your region is outperforming or lagging behind
the nation, as well as which competencies your regional economy depends on.

High-LQ competencies will be found in high-LQ occupations, which are also generally found
in high-LQ industries. Such industries are generally the region’s export-oriented industries,
which form its economic base.

High-LQ competencies are thus the competencies that are vital for the region’s continued
economic stability and growth.

LQ for Demographic Groups

Location quotient is useful in demographic studies because it shows what makes the region’s
demographics unique in comparison to its state and/or the nation. For example, if age groups
over 60 have an LQ greater than 1, then the region has a higher than average concentration of
residents over 60. If the percent change in LQ is positive, then the over-60 age group in the
region is also growing faster than the nation.

“State LQ” calculates the regional LQ(s) by dividing the regional concentration of a
demographic group by the state concentration. “National LQ” calculates the regional LQ(s)
by dividing regional concentration by national concentration. For example, suppose that in a
certain region, 7.5% of the population is age 60 to 64. In the region’s state, this age group
composes 6% of the population, while in the nation it composes 5.8% of the population. This
group is thus 1.25 times more concentrated in the region than the state (7.5% divided by 6%),
and 1.29 times more concentrated in the region than the nation (7.5% divided by 5.8%). So
the state LQ would be 1.25 and the national LQ would be 1.29. If the region contains areas in
two or more states, then the average concentration in all those states is the basis for the LQ
calculation.

LQ numbers can be useful for many different analyses, such as the challenge of an aging
workforce or the need to create more employment opportunities for a certain ethnic group.
Suppose 25% of the population of the Western Region is composed of Fantes, while only
10% of the national population are Fantes. The LQ of Fantes in the Western Region as
compared to the nation (national LQ) is thus (25 / 10) = 2.5, meaning that Fantes are 2.5
times more concentrated in the Western Region than the national average. This helps to
quantify the region’s demographic uniqueness and thus inform policy.

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Other Benefits of LQ

• It guides governments in the distribution of industries in a country

• It also facilitates in the redistribution of labour in an economy.

• It enhances assessment of performance of industries in an economy.