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ESSAYS O N ISSUES T H E FEDERAL RESERVE BANK O F C H IC A G O O C T O B E R 1990 N U M B E R 38 Chicago Fed Letter Tracking by the N o rth Star The decade of the 1980s witnessed an explosive rise in economic develop m ent efforts at the state and local level. By the end of the decade, eco nomic development, at one time or another, had been among the top three items on most state agendas. Municipalities, both large and small, took up economic development as a major public policy initiative. During the early 1980s, manufacturing continued to expand. The total employment became a less significant population of three states—Califor com ponent of the national and Dis nia, Texas, and Florida—increased by trict economies. In 1979, 28% of the over 11 million. Looked at another District’s employment was derived way, these three states had a popula from manufacturing. By the end of tion increase during the decade that 1982, the share of manufacturing em was almost equal to the 1990 prelimi ployment had fallen to about 24%. nary population estimate for all of the state of Illinois. These employment losses and struc tural changes were reflected in slug Economic shocks, structural changes, gish or declining population growth and demographic shifts presented over much of the decade. For ex significant public policy challenges Source o f concern There were a num ber of economic and political reasons that prom pted state and local interest in economic development. One of the primary factors contributing to this interest was the back-to-back recessions of the early 1980s. Between December 1979, and November 1982, total nonagricultural payroll employment in the U.S. fell from 91.3 million to 89.4 million. The effects in the manufac turing sector were even more pro nounced. During the same period, manufacturing employment in the U.S. fell from 20.9 million to 18.2 million. These effects were felt more severely in the Seventh District where manufac turing represented a larger propor tion of total employment relative to the nation. From December 1979, to November 1982, total nonagricultural employment in the Seventh District declined by 1.3 million workers, a drop of almost 10%. Over this period manufacturing employment in the District fell by some 877,000. Put another way, the District lost almost one-fourth of its manufacturing em ployment in a three-year period; and one-fifth of that loss was concentrated in the Chicago metropolitan area. ample, preliminary Census data indi cate that the five District states’ popu lation declined by about 160,000 be tween 1980 and 1990. Further, only two District states (Indiana and Wis consin) gained population over the decade (see Figure 1). While subject to dispute, these preliminary Census figures indicate a possible decline of 9.3% in the population of the city of Chicago and a loss of 19.4% in the city of Detroit between 1980 and 1990. for states and municipalities in the Seventh District. Many involved in economic development planning looked for ways to emulate the growth evolving in the Sun Belt states. Numerous strategic economic plans were devised to retain and at tract new jobs and industries to the District. In many instances, the suc cess of these efforts was measured by the local performance as compared to a perceived Sun Belt competitor. During the decade of the 1980s, people in the U.S. continued to move west and south and the Sun Belt states However, basing Seventh District economic development policies upon economic changes in other regions of One observation emerges from these facts. While Chicago has struggled to decide whether it wants to become either an industrial center or a serv ice center, the balance appears to weigh in favor of services. On the other hand, T oronto’s strategy has been to focus on becoming the de sired location for head offices of European and Asian firms. Thus, what is of further interest are the paths followed by the two metropoli tan areas to get to where they are today and where they may go in the future. the U.S. may not be appropriate. Is it reasonable to expect a mature and structurally changing city, e.g., Chi cago, to be able to achieve the 15% population growth experienced by Los Angeles during the 1980s? Given the fundamental differences between regions (such as climate) and the changes that have evolved (such as demographics), it is not clear that such comparisons will lead to appro priate policy prescriptions. If the Sun Belt region is an inappro priate benchmark for comparison, then what alternative exists? The challenge becomes one of identifying economic areas that are somewhat similar in their economic and demo graphic factors. For the purposes of this Chicago Fed Letter, I have chosen to compare the metropolitan econo mies of Chicago and Toronto. A comparison o f “ Second Cities” Chicago and Toronto are similar in several aspects. Both are viewed as im portant “ second cities” within their respective nations in North America. Chicago is the larger of the two metropolitan areas with a 1988 population of 7.4 million. Toronto’s population was 3.5 million.1 The offset to Chicago’s larger abso lute size is the fact that Toronto is Canada’s largest metropolitan area with 14% of Canada’s population. Chicago is now the third largest met ropolitan area in the U.S. with about 4% of the total population. Both metropolitan areas have exten sive industrial bases (see Figure 2). In 1989 manufacturing employment represented about 18% of Chicago’s employment and 23% of T oronto’s. Chicago’s manufacturing employ m ent share approximately equals that of the U.S. while T oronto’s is about 5 percentage points higher than the Canadian average. Both metropolitan areas have m anufactur ing concentrations in printing and publishing, chemicals, fabricated metals, nonelectrical machinery, and electric and electronic equipment. Chicago has a larger share of its em ployment in the public and private service sector (39% for Chicago ver sus 35% for T oronto).2 Both m etro politan areas have attracted a large num ber of each nation’s corporate headquarters for industrial activity. As of 1988, 198 of Canada’s 500 larg est industrials had head office opera tions in Toronto, while Chicago had only 42 of the U.S.’s 500 largest in dustrial head offices. Both metropolitan areas have under taken efforts to build upon their banking and other financial service industries. Interestingly, in 1989 both metropolitan areas had very similar shares of employment (8% in Chicago and 9% in Toronto) cen tered in finance, insurance, and real estate. Both metropolitan areas also have about equal shares of em ployment in the combined manufac turing and public/private service sectors. Differing patterns o f growth Comparing employment growth from the first quarter of 1983 through the fourth quarter of 1989 reveals some interesting insights into the performance and evolution of these metropolitan economies. (This period represents the seven years of sustained economic growth in the United States.) First, the data reveal that T oronto’s total employment growth over this period was about 7 percentage points greater than Chicago’s (see Figure 3). Toronto’s employment was up by 29% compared with Chicago’s growth of 22%. T oronto’s total em ployment growth exceeded that of both Canada (up 22%) and the U.S. (up 23%). Comparing the two areas’ highgrowth sectors reveals that Toronto tended to exceed Chicago’s growth in most sectors (see Figure 4). T oronto’s employment growth was greater in construction; finance, insurance, and real estate; retail trade; and wholesale trade. Chi cago’s performance exceeded that of Toronto in transportation and utili ties. Interestingly, both areas had identical growth in their service sec tors (26%). Differing approaches to change Many of the forces of change lie beyond the scope of local control. Demographic shifts and globalization of the world economy are factors that percent, 1 9 8 3 Q 1 -8 9 Q 4 3 0 ------------------------------------------------------------------------------------------------ This metropolitan council also pro vides a means by which the city of Toronto can borrow against its finan cial resources to support the growing suburbs. The metropolitan council finances education for the area. The system of public and private schools receives funding from a metropolitan-wide property tax. It is felt that this m etro politan support for education has been responsible for retaining middle class residents in Toronto. Toronto m etro U .S . Canada Chicago metro affect most regions that they have no means of modifying. At the local level, however, planning and development efforts can modify the outcome of events that are under local control. It is in this area that the two metropolitan areas have taken different approaches. In the early 1950s, Toronto enacted a federal form of government that consolidated 13 independent munici palities into six. These six govern mental bodies are responsible for local affairs, while a metropolitan council administers certain regional services, such as trash collection and transportation, and planning. Toronto, like many American cities, has suffered from urban sprawl. To limit such growth, Toronto planners have resisted efforts to expand the highway system through the city. Such limitations are considered es sential to avoid neighborhood dete rioration and keep riders on the public transportation system. The approach to economic develop m ent and planning problems in the Chicago metropolitan area has been more fragmented. This arises, in part, from the fragmented structure of government in the state of Illinois. The state, as of 1987, had a total of 6,627 governmental bodies. Of these governmental units, 1,299 (20%) were located in the eight-county Chicago metropolitan area. Many of these units contribute directly or indirectly to development-related efforts. These multiple jurisdictions make the coordination of development and planning more difficult. The shift of jobs and businesses to subur ban areas has raised the costs and stymied development planning in critical areas such as transportation and education. It is im portant that state and local areas identify appropriate areas for comparison. This article has sug gested that in the past many jurisdic tions in Seventh District may have tracked an inappropriate target—the South and the West. Comparing Chicago and T oronto’s paths of de velopment and change might lead to more insightful and valuable policy conclusions. —David R. Allardicel2 lT h e C h icag o m e tro p o lita n a re a is d e fin e d as C ook, D uP age, G rundy, K ane, K endall, L ake, M cH enry, a n d Will C o u n ties. T h e T o ro n to m e tro p o lita n a re a re fe rs to th e T o ro n to C ensus M etro p o li ta n A rea, w hich in c lu d e s th e city o f T o ro n to a n d 29 su rro u n d in g m u n ic ip a li ties. 2S om e d iffe re n c e s in se c to r e m p lo y m e n t m ay arise d u e to d iffe rin g m e th o d s e m p lo y ed in th e two c o u n trie s ’ m e th o d s o f d a ta co llectio n . Karl A. S cheld, S en io r Vice P re sid e n t a n d D irecto r o f R esearch; David R. A llardice, Vice P re sid e n t a n d A ssistant D irecto r o f R esearch; E dw ard G. N ash, E ditor. Chicago Fed letter is p u b lish ed m o n th ly by th e R esearch D e p a rtm e n t o f th e F ed eral Reserve B ank o f C hicago. T h e views ex p ressed are th e a u th o rs ’ a n d are n o t necessarily th o se o f th e F ed eral Reserve B ank o f C hicago o r th e F ed eral R eserve System. A rticles may be re p rin te d if th e so u rce is c re d ite d a n d th e R esearch D e p a rtm e n t is p ro v id ed with copies o f th e rep rin ts. Chicago Fed Letter is available w ith o u t ch arg e fro m th e Public In fo rm a tio n C e n te r, F ed eral Reserve B ank o f C hicago, P.O . Box 834, C hicago, Illinois, 60690, (312) 322-5111. Construction Transportation and utilities Finance, insurance, and real estate Services Retail trade Wholesale trade ISSN 0895-0164 1983 1984 1985 1986 1987 After advancing for two straight months, manufacturing activity in the Midwest dropped 0.9% in July, mostly from employment cutbacks. Modest employment losses were recorded in about half of the industries, but electrical equipm ent was the only industry with a sharp decline. Manufacturing employment be tween May and July rem ained at its highest level since September 1989. The decline in Midwest manufacturing was deeper than the 0.1% national decline in July, with all major sectors in the Midwest weaker. The Midwest re bounded from its lowest point of the year in April at about the same pace as the nation (up 2.5%), with the transportation sector playing a key role. Chicago Fed Letter F E D E R A L R E S E R V E B A N K O F C H IC A G O P u b lic In fo rm a tio n C e n te r P .O . B ox 834 C h ica g o , I llin o is 60690 (312)322-5111 1988 1989 1990 N O T E: T h e MMI a n d th e USMI are co m p o site in d ex es o f 17 m a n u fa c tu rin g in d u stries a n d are d eriv ed fro m e c o n o m e tric m o d els th a t estim ate o u tp u t fro m m o n th ly h o u rs w o rk ed a n d kilow att h o u rs d ata. F or a discussion o f th e m eth o d o lo g y , see “R eco n sid erin g th e R egional M a n u fac tu rin g In d e x e s,” Economic Perspectives, F ed eral Reserve B ank o f C hicago, Vol. XIII, N o. 4, Ju ly /A u g u s t 1989.
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