Benefits of traded sector activity

Impact on local jobs

The traded sector affects the size and health of the local sector. Growth in the traded sector generates growth in the local sector.4

As employment and income in the region increases, demand for local goods increases. More people and more money mean more customers for local grocery stores, restaurants, hairdressers, carpenters, etc. Figure 5 helps to illustrate this relationship. The line in the figure represents the average relationship between the growth in employment over the past 30 years.

One recent estimate developed by economist Enrico Moretti suggests that, on average, one additional high-skill traded-sector job creates 2.5 local-sector jobs, and one additional low-skill traded-sector jobs is associated with one additional local-sector job.

Impact on local income

A clear correlation exists between changes to traded-sector income and changes to local-sector income for U.S. metro areas.

Much of the difference in income (and prices) across various metro areas comes from differences in the productivity of the regionís traded sector.5 Because traded-sector employers compete in large markets, the price of traded products is tied to the prices charged by companies from other regions. For Portland-metro workers to earn more than metro workers, who are producing the same good for a similar price, Portland-metro works must produce more value-added products or services.

Higher value-added products or services lead to higher traded-sector wages that can help grow the wages of a regionís local sector. Because a regionís local- and traded-sector employers compete for the same workers, the local-sector employer must pay higher wages to attract employees.6 As a result, higher regional income levels stem from higher productivity in the traded sector. This higher income level can, however, also impact costs for housing in a highly productive region.

Boosts to small business growth and development

A healthy traded sector can lead to the formation and growth of small, local businesses. As the traded sector increases employment and wages, it also encourages entrepreneurs to start new businesses. Furthermore, if traded-sector firms attract skilled workers or encourage the creation of ample, independent suppliers, then starting a new business in the area may become more attractive and less costly.

Some traded-sector businesses reach such scale that they become anchor firms, forming the nucleus of an industry cluster with small start ups, relocations and spin-off companies seeking the talent, ideas and innovation surrounding the anchor employer. One example in the Portland-metro region is the activewear and outdoor equipment cluster that has grown around Nike and Columbia Sportswear.

Traded-sector industries frequently invest in research and development that attract smart, innovative people. The hiring of these individuals makes it more likely that a local entrepreneur will have a new, breakthrough idea that supports the creation of new firms and the growth of new or existing industries.

The health and characteristics of a regionís traded sector may affect the level of entrepreneurial activity in a location. Historically, Portland-metro (including its traded sector) provided a favorable climate for small and new businesses.

The rate of new business creation in Oregon used to be well above average. In 1996, each month 49 out of every 10,000 adult Oregonians started a new business at which they worked at least 15 hours per week.7 In contrast, across the U.S., only 31 out of every 10,000 adults started a new business each month in 1996.

However, in recent years, Oregonís rate of new business formation has declined. Between 2009 and 2011, Oregonís rate of new business creation fell to 32 new businesses for every 10,000 adults, approximately equal to the U.S. average of 33 businesses per 10,000 adults. The decline in entrepreneurship is troubling and may be indicative of or related to weaknesses in the traded sector, since many new businesses are launched to support traded-sector partners. This concerning trend is evident in Figure 6, which shows how Oregon has historically trended above the U.S. average but has fallen below in recent years.

Growing the traded sector

A region derives its economic capacity from innovation and the four forms of capital: natural capital (climate, natural resources), physical capital (machines, roads, buildings), human capital (people and their skills) and social capital (institutions and social norms).

Some traded-sector industries require natural resources, so they locate in regions that offer particular natural advantages such as good soil or low-cost energy sources. Other traded-sector industries need access to markets, so they locate near transportation hubs such as ports, rail and road facilities. Still other traded-sector industries require access to well-educated or innovative people or ideas, so the sector grows up around particular individuals or groups, often linked to universities or an innovatorís hometown, which was the case with Phil Knight and Nike or Bill Gates and Microsoft.

Some factors that influence the location decisions of traded-sector employers, like natural resources and global economic conditions, are largely outside a regionís ability to influence.

Other factors, such as support for entrepreneurial activity and governance, can be influenced by public policy. For instance, if the local construction industry or local government land use and building regulations are inefficient, the cost of building new houses, factories, or office buildings will increase, decreasing regional traded-sector competitiveness.

If local school systems or health care systems provide low-quality services at a high cost, the quality of the local workforce will suffer and costs will increase, which tends to reduce regional traded-sector competitiveness. Or if tax policy inhibits business launches or wealth creation, the result may be more reluctance on the part of entrepreneurs to invest time, energy and capital in a particular area.

In other words, a regionís infrastructure Ė both human and physical Ė can impact a regionís traded-sector productivity and wages.

4 There are both positive and potentially negative aspects of traded-sector growth. Job and wage growth are positive but may impact housing costs if housing supply is constrained relative to demand.

5 Avent (2011)

6 Economists refer to this result as the Balassa-Samuelson effect (after the economist who first advanced this theory).

7 Fairlie, R. (2012) Kauffman Index of Entrepreneurial Activity, 1992-2011. www.kauffman.org/kiea