The impact of changing diversification on stability and growth in a regional economy

Economic diversification has long been considered a potential determinant of stability in regional economies, with policymakers often emphasizing efforts to diversify local economies as a means of reducing cyclical swings in unemployment. In recent years several cross sectional studies comparing different regional economies have supported the linkage of diversification and stability, while suggesting a tradeoff between stability and growth. This study is a time series examination of employment data for a single regional economy to ascertain whether changes in diversification over a 30-year period play a statistically significant role in explaining stability and rates of growth. Multiple regression analysis is used to determine the role of diversification and other factors. The study finds that volatility, measured as deviations from the mean growth rate of employment, is inversely related to changes in diversification. Volatility over time is positively related to the percentage of employment in resource-based industries. A division of the data into separate ten-year periods found that an increase in employment concentration (lower diversity) was associated with an increase in the variance of growth rates. Separate regressions show that the growth rate of employment is negatively related to diversification, and positively related to the growth rate of US employment and the percentage of employment in resource-based industries.