by Dr. Patrick Jones
Ideally, the structure of a local economy resembles that of a well-balanced individual investment portfolio. That is, there is enough concentration in a winning sector to make a difference in the overall return, but not so much concentration that a downturn risks the entire asset/sector. In an investment portfolio, we mitigate these risks largely by spreading out the investment over several types of assets. Or simply put, we don’t want to put all our eggs in one basket.
Of course, a local economy doesn’t enjoy that degree of autonomy. Industries or sectors dominate due to historical reasons. In turn, these historical reasons are often based on the natural resources found by European settlers to the area. In Seattle, that would be access to the fisheries, forests, and other ports. Here, it has undoubtedly been the fertile soil and temperate climate that made agriculture so productive.
Concentrations of economic activity can arise from other factor, too. Consider Silicone Valley. Undoubtedly, many factors lie behind the rise of technology firms in California’s lower bay area, but a leading one is the presence of Stanford University. One could make a similar case for MIT and to a lesser degree, Harvard, as the key impetus behind Boston area’s tech cluster.
Walla Walla Trends Indicator 1.3.6 tells the story of sector concentration in Walla Walla County. It is measured by the size of the labor force, specifically by the total number of workers in the five largest sectors (as measured by workers). The measure is closely related to Trends Indicator 1.3.5, which presents the five largest sectors separately in a bar chart.
Examining Indicator 1.3.5, we see the five largest sectors in the County in 2019, listed in order: government (at all levels), health care and social assistance, manufacturing, agriculture and retail trade. The shares of the workforce taken up by these five sectors have been relatively stable over the past 15 years, leading to a concentration rate in Indicator 1.3.6 of about 71% in 2019. In other words, a little less than three quarters of economic activity, at least measured by workforce, can be attributed to five sectors.
As Indicator 1.3.6 reveals, Walla Walla’s concentration is considerably higher than its neighbor to the west, Benton County. In 2019, its version of this measure registered about 60%. Yet, Walla Walla’s economy is a bit more diversified than Yakima, where its 2019 value was about 74%. (Over time, Yakima’s economy has become a bit less diversified, largely due to agriculture’s increasing share.)
Typically, a larger economy will show lower concentration ratios. A larger economy simply enjoys the advantage of a greater variety of industries which respond to the larger population. For example, the equivalent measure for 2019 for Washington state was only 57%. So it certainly isn’t surprising that Walla Walla, with a population of less than 65,000, sports a concentration ratio considerably higher than that of the state, with 7.6 million residents.
What might be the ideal level of diversification for the local economy? Is it reasonable to assume that Walla Wall might enjoy a ratio like that of Benton County – 60%. It’s possible but unlikely, it seems to this observer. An economy typically develops by capitalizing on its strengths. Adopting this stance is usually the one taken by economic development organizations, because it recognizes the value of specialization. This specialization carries with it the advantage of skills that are competitive in broader markets, regional or even national. Simply put, an economy cannot be all things to all markets. In the very competitive world that we all find ourselves, specialization has its advantages.
And this specialization even characterizes some of our largest metro economies. Finance has long defined the economy of New York. The entertainment business the economy of Los Angeles, steel in Pittsburgh, autos in Detroit.
The last two examples reveal the danger, however, of a local economy putting its emphasis (eggs) in one basket. Steel production has dramatically declined in Pittsburgh as has the automobile workforce of Detroit. For smaller economies, the losses that accompany the closure of a particular industry can be devastating. In eastern Washington think of the wood mill closure in Omak or the gold mine shutdown in Ferry County.
So economic development needs to tread a fine line. Avoid a one horse economy yet be specialized enough that one’s companies can compete with regional and/or national firms. And the outlook for those sectors which loom large in a local economy matters, too.
The mix of sectors in Walla Walla certainly speaks to the last point. While Walla Walla may show a high concentration in a few sectors, most of these are, relatively speaking, resistant to downturns Government, as Indicator 1.3.5 depicts, anchors the largest sectors. The mix of government here – federal (VA and the Army Corps of Engineers), state (the penitentiary) as well as local is a stronger combination than most counties. While not recession-proof, most government agencies show less volatility than the private sector.
The healthcare (and social assistance) sector, second-largest, has grown the fastest among the top five since 2003. (The hospitality sector has actually increased a bit faster.) This sector, too, while not immune to economic downturns, looks to have a robust long-term future, especially in a community with a large and expanding 65+ population. Further, Walla Walla agriculture continues to deliver steady growth, either through the strong legacy of wheat, the brand of Walla Walla grapes and wine, and other horticultural products such as onions and tree fruit.
Manufacturing here is based in food, and like agriculture, likely only to grow. The final large sector, retail, might be the least secure, in this era of online shopping. But...
So Walla Walla’s mix of economic activity, while concentrated, is based on a stable set of players. Would it be great to have an up and coming software industry in town, developing apps and the latest multi-player games for AR and VR worlds? Of course. But that’s not too likely to happen. For now and the foreseeable future, the risk of putting too many economic eggs in one basket is remote.