Economic diversity and stability of growth: U.S. metropolitan regions, 1978-198

This study investigates the local factors which determine the degree of regional economic diversity and examine the relationship between regional diversity and stability of growth in U.S. metropolitan areas. Entropy and Ogive measures of industrial diversification and a measure of economic instability are calculated for all of 312 metropolitan areas in the U.S., using nonagricultural employment for the period 1978-1987. Two analytic models, cross-section and fixed effect, are employed to estimate the effects of local factors on diversity. Seven local factors are suggested as being associated with regional economic diversity. Among them, population size and local wage level are the most important factors explaining the variation in regional economic diversity. In the linear model, population size shows a strong positive effect on diversity, while the wage level has a strong negative effect. In the non-linear model, cross-sectional analysis provides a biased effect of population growth on diversity because of the strong effect of a limited number of highly specialized or diversified areas. With the control of time-specific and SMSA-specific effects, the fixed effect model reveals a polynomial relationship, indicating a tendency toward industrial specialization with population growth until a population of 3 million is reached. Beyond 3 millions, diversification increases with population size until a population of 8 million is reached. Beyond 8 millions, industrial specialization resumes with further increases in population.;Regional economic diversity is a significant factor in helping explain regional economic stability. The greater the diversity, the more stable the regional economy. However, the pattern is non-linear: regional economies are more stable at the extremes of specialization and diversification than they are in the middle range. This finding strongly supports Norcliff's argument that a diversity-oriented policy may not always be a desirable device to improve regional economic stability.