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Florida State University 
Department of Urban and Regional Planning
Planning Methods III: Forecasting 





Topic
Summary
Calculation of
Shift-Share
Projections
Calculation of
the Shift Term
Example
Key Concepts
Lessons to
be Learned
Discussion
Questions
References
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SHIFT-SHARE TECHNIQUE

Topic Summary

Recall that the purpose of the Constant Share and Shift-Share Techniques is to project future employment in a given area. To do this the Constant Share Technique assumes that each industry will continue to maintain a "constant share" of the reference region's employment into the future. If an industry has 5% of the employment share now, it will have 5% it is assumed that this industry will have 5% in the future as well. Clearly, this is a very debatable assumption and one that is not likely to hold for the vast majority of industries in a local economy.
In response to this significant shortcoming in the Constant Share approach, economists have developed the Shift-Share Technique. An offshoot of the Constant Share Approach, the Shift-Share Technique recognizes that some local industries are likely to be growing at a faster rate when compared to the reference region and other industries will be growing more slowly. To quote from Klosterman:
"The shift-share projection technique modifies the constant-share projection formula by adding a shift term to account for differences between local and reference region growth rates that cause an industry's employment to shift into or out of a region." (pps. 176, 178)
Like the Economic Base Analysis Techniques that expanded upon and improved upon previous methods, the Shift-Share approach represents a useful refinement of the Con-Share Technique. Rarely does the local economy remain static when compared to a reference economy. The local economy may specialize in certain industries and attract employment in that industry, thereby increasing its employment in that sector. For example, the Seattle Metropolitan area has specialized (and to some degree continues to do so) as a center for Transportation Manufacturing. At the other end of the spectrum, an area may lose employment in certain industries to regions that have specialized in those products and services. Seattle's waterfront has lost some employment to Tacoma and other West Coast cities due to a variety of factors (among them better transportation linkages and newer facilities).
The Constant Share method cannot and does not take these changes (or shifts) into account in any way. The Shift-Share Technique attempts to account for these "shifts" in employment by recognizing certain trends and accounting for them in the calculation of employment projections.

Calculation of Shift-Share Projections

The Shift-Share approach is based upon the modification of the Constant-Share method. As with the Con-Share method, a local economy is compared to a reference region economy. However, a shift term is calculated to account for changes in the local economy.
The basic formula for the Shift-Share approach:
Projected Employment
Industry I=
(
1+
Reference Region Projected Growth Rate, Industry I
+
Projected Local Employment Shift Term
)
X
Industry I Local Employment
Again, note how the Shift-Share approach assumes that projected local industry employment is directly related to the Reference Region employment growth rate, but that the calculation includes a "shift term". The only modification to the Constant Share formula is the addition of the Shift Term to our calculation. The calculation of the shift term will be addressed shortly, but for now let's go through a simple example and compare the Shift Share technique to the Constant Share approach.
Using the above formula and the following information what would be the projected employment for Industry I?
Ref. Region Growth Rate
0.3055
Shift Term
0.0741
Industry I Local Employment
2,500
The calculation would be as follows:
Shift Share Projected Employment= (1+ 0.3055 +0.0741) X 2,500 = 3,449
In our local economy, having calculated a Reference Region growth rate of 0.3055 (30.55%), an additional industry shift term of 0.0741 (7.41%), and a local economy employment on 2,500, Industry I would be projected to have 3,449 jobs in a the future year.
Using the same information with the Constant Share Formula the projected employment would be estimated to be:
Con Share Projected Employment= (1+ 0.3055) X 2,500 = 3,264
Interpreting Our Results
In our example we can see that the use of the Shift Term in the Shift Share method means a difference in our projections of almost 200 jobs. (3,449 - 3,264 = 185) This difference results directly from our Shift term. A positive shift term, in this case over 7%, indicates that the growth rate in Industry I is greater in the local economy than in the reference economy. Again, to reiterate, the shift term attempts to account for local conditions.
For example, airplane manufacturing is growing faster in King County than in the State as a whole. Therefore the local shift term must be positive. Further, the larger the industry-specific shift term the greater the divergence from the overall regional growth rate. A shift term of 0.0891 will have a greater effect than a shift term of 0.0221.

Calculation of the Shift Term

This Shift Term is calculated by comparing the growth rates in the local and reference region. As Klosterman notes, it is important that these calculated growth rates be for the same period of time. If they are for differing numbers of years a correction will need to be employed in our formulas (see Klosterman pps. 178-184)
The Shift Term formula is very simply:
Shift Term =
Local Growth Rate
for Industry I for Period X
-
Regional Growth Rate
for Industry I for Period X
And, from the Constant Share page, a growth rate is calculated using the formula :
Growth Rate Formula=
(
Projected Employment Value
-
Previous Employment Total
)
/
Previous Employment Total
Using the following information, then, calculate the Shift Term for our Industry I:
Year
Local Employment Industry I
Reference Region Employment
Industry I
1985
1,826
72,984
1995
2,500
89,267
The Growth Rates for our two regions, from 1985 to 1995 would be:
Local GR= (2,500 - 1,826) / 1,826 = 0.3691
Regional GR= (89,267 - 72,984) / 72,984 = 0.2231
And the Industry I Shift Term would be:
Shift Term = 0.3691 - 0.2231 = 0.1460
Interpreting Our Results
In interpreting these results we would determine that the local economy is growing faster in Industry I than the regional economy, because the Local growth rate is greater than the Regional growth rate. Therefore, there is some evidence that the local economy might be specializing in this Industry and we therefore might want to account for that in our calculations. We would then use this Shift Term in our Shift Share projection formula to account for this information.

Example

UNDER CONSTRUCTION

Key Concepts

  • The assumptions of the Shift Share technique
  • The calculation of industry specific Reference Region Growth Rates, Local Growth Rates
  • The calculation of industry specific Shift terms
  • The calculation of projected local industry employment using the Shift Share technique
  • Interpretation of the Growth Rates and Shift Terms
  • The fundamental difference between the Con Share and Shift Share techniques and the rationale behind this difference

Lessons to be Learned

  • As should be clear by this time in the course, planners often use simple, but powerful analysis techniques to estimate current conditions and to make projections about the future. The simplicity and elegance of these techniques also lead to modifications to these techniques. However it is important to note that these modifications are often themselves quite simple and quite elegant. The Shift Share projection technique is an example of this. The simple Constant Share approach has been modified to account for local conditions by adding one factor to the Con Share formula, the Shift Term. Again, simple modifications to standard practices should be the first means of adding complexity to an analytical tool.
  • Another key lesson of the Shift Share approach is that generic formulas are powerful, but limited tools. Modifications to standard analytic methods, especially those that take into account local conditions, are often the first means of applying these generic techniques to a local situation.
  • "The computational simplicity of these projection models (Con Share and Shift Share), relative to more sophisticated techniques, provides a pragmatic justification for using them to prepare quick and reasonably accurate short-run projections. They are also appropriate for preparing long-term 'baseline' forecasts examining the implications of continuing past employment trends into the future." (Klosterman, p. 186)

Discussion Questions

  • What would a negative shift term indicate? Give an example of an industry in King County that might show a negative shift term when compared to the State economy. Why did you choose this industry?
  • Why is it necessary to have a comparable time period when calculating the Local and Regional growth rates? What modification does Klosterman recommend when the two time periods are not the same?
  • What dangers do you see in using the Shift-Share technique? In what conditions might the Shift-Share technique be a poor choice?
  • Why have the Constant Share and Shift Share techniques come under attack? What shortcomings have researchers identified as regards these models? (pps. 184-186)

References

Emmerson, Richard R., R. Ramanathan, and Wolfgang Ramm. 1975. "On the Analysis of Regional Growth Patterns." Journal of Regional Science 15: 17-28.
Greenberg, Michael R. 1972. "A Test of Alternate Models for Projecting County Industrial Production at 2,3,4 Digit SIC Levels." Regional and Urban Economics 1: 397-418.
Klosterman, Richard E. 1990. Community and Analysis Planning Techniques. Rowmand and Littlefield Publishers, Inc. Savage, Maryland. See Chapter 12.
Klosterman, Richard E., Richard K. Brail, and Earl G. Bossard. 1993. Spreadsheet Models for Urban and Regional Analysis.
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