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FEDERAL RESERVE BANK
OF ST. LOUIS
JULY 1970

Vol. 5 2 , No. 7

Inflation and Its Cure
by NORMAN N. BOWSHER

P r i c e s HAVE INCREASED ever more rapidly
since 1965, and in the past year overall prices have
risen more than 5 per cent. The inflation has re
distributed income and wealth and contributed to
inefficiency. The Government began taking actions in
mid-1968 designed to restrain inflation. Since elimi
nating inflation, by necessity, involves costs, a course
of gradual correction has been followed with the
objective of holding such costs to a tolerable level.
In this article, recent developments are reviewed
with the objective of throwing some light on: 1)
progress made in reducing inflation; 2) costs of adjust
ing to the inflation; and 3) costs generated by the
struggle to reduce the inflation.
As in two previous articles in this Review, the
current situation is compared with three earlier
periods of economic correction.1 August 1969 is used
here as a tentative beginning for the current adjust
ment, since it is the middle of the quarter when
output of goods and services was greatest. Develop
ments since August are compared with developments
in the corresponding periods after the July 1953, July
1957, and May 1960 peaks, as selected by the Na
tional Bureau of Economic Research. These three
earlier periods were quite mild corrections judged in
the light of longer experience in modem economic
history.

Progress Against Inflation
Inflation has proceeded at a faster and faster rate
since 1964. Overall prices, which had been rising less
^ ‘Downturn Remains Mild,” this Review (June 19 7 0 ), pp. 2-7,
and “Extent of the Slowdown,” this Review (M arch 19 7 0 ),
pp. 2-5 and 14-16.
Page 2

than IV2 per cent a year in the early 1960’s, increased
2 per cent in 1965, 3.5 per cent in 1966 and 1967,
4 per cent in 1968, and 5 per cent in 1969. The
acceleration of price advance reflected a rise in total
spending for goods and services at an average 8 per
cent annual rate from late 1964 to late 1969, or
roughly double the rise in production capacity. The
excessive rise in total spending was fostered by gen
erally expansive fiscal and monetary actions from 1964
through 1968.From the third quarter last year to the second
quarter this year, overall prices rose at an estimated
5.3 per cent annual rate, even faster than the 5 per
cent increase in the previous year. To many, this is
evidence that the struggle against inflation has failed.
However, prices respond to many factors, including
lagged effects of previous excesses, and since the
current period of correction follows about four years
of growing inflationary pressures, some temporary con
tinued acceleration of price rises was to be expected.
As inflation intensifies, it becomes more resistant to
corrective measures, and prices continue to rise for a
period after excessive “demand-pull” pressures on
resources and prices are removed. In the year before
the three previous business cycle peaks, prices rose
an average of 2 per cent. In the first two quarters of
the correction periods, prices rose at an average 2.3
per cent annual rate. Thereafter, the rate of price
rise began moderating. The strong upward thrust of
prices during the initial phase of restrained spending
growth may reflect the fact that spending, although
dampened, may nevertheless be excessive for a few
2“1968-Year
pp. 3-14.

of Inflation,” this Review

(Decem ber

1 9 6 8 ),

FEDERAL RESERVE BANK OF ST. LOUIS

JU LY , 1970

months. Further, many prices and wages do not adjust
immediately in the presence of unduly large demand
pressures. This may be due to inertia, lack of knowl
edge of real costs, public opinion, regulations, con
tracts, or a money illusion. These lagging price
adjustments place “cost-push” forces on other prices
when they do occur. Consequently, success in the
struggle against inflation, once it has been permitted
to gain momentum, takes time.
A quick dampening of inflation is even less likely
now than in the 1953-54, 1957-58 or 1960-61 periods
for several reasons: the upward thrust of prices has
been much stronger than during the earlier periods;
policies to resist inflation have been milder; and their
impact on spending has been less. Total spending on
goods and services has slowed only moderately since
the third quarter of last year to an estimated 4 per cent
annual rate of increase. In sharp contrast, spending
declined at a 2 per cent average rate in the correspond
ing periods of the three previous adjustments.
Total Spending on G oods and Services
G ro ss N a tio n a l Product (Current Dollars)
P e a k s = 100
105

P e a k s - 100
105

A v e ra g e of 1959-61,1956-58,
and 1952-54
i
\

/ V
a
' /
1968-70

100

\
1
1
1
1
I
/
/

/
1
1
t

100

S e a s o n a lly A d ju sted

3RDQTR.'53
^
3RD Q TR:57
2N D Q TR.60
3RD QTR '69
---------- 1
---------------------- i---------- 1---------------------- -1----------1

-i

-------

Q U AR TERS TO A N D FROM P EA K
L a te std a ta p lo tted : 2nd q uarter estim ated
So u rce : U .S . D e p a rtm en to f Com m erce

ary pressures. Comparisons with previous experiences,
when inflation was less ingrained and when antiinflationary measures were pursued more aggressively,
indicate that a substantial reduction of the current
inflation will take a long time. According to estimates
of this bank, if the gradual approach to resisting in
flation is continued, substantial price stability may not
be achieved for three more years.3

Costs of Adjusting to Inflation
The costs of inflation have been substantial and
far-reaching. Some have suggested that once inflation
becomes fully anticipated and provided for in all
contracts and other transactions, its cost would be
very light, perhaps even zero. However, the current
inflation has not been fully anticipated, and while
some adjustments to it have been made, many others
have not. As a result, the inflation has had, and is
likely to continue to have, severe consequences. In
brief, inflation reduces the value of money and other
dollar-denominated assets relative to the value of
other assets, causing a redistribution of wealth and
income. The process of adapting to higher and higher
rates of inflation, given existing contracts, laws, and
other rigidities, causes inefficiencies, inequities, and
interruptions to production.
Some costs that society has suffered in the process
of adjusting to higher and higher rates of inflation
have been incorrectiy labeled a cost of resisting infla
tion. One example is the capital loss experienced by
some bondholders in recent years. Some have said
interest rates have been increased (bond prices low
ered) in an attempt to reduce the excessive spending
by making credit more costly and difficult to obtain. It
has been suggested that this raising of interest rates
has proceeded so rapidly that it has fostered fears of
a liquidity squeeze or money panic.

Other developments also reflect the gradualism of
the recent approach to resisting inflation. Retail
sales rose at an estimated 4 per cent annual rate from
August to May, a slightly greater rate than in the
previous year. In the corresponding nine months after
the three previous peaks, retail sales declined at a 2
per cent average rate. Personal income, likewise, has
slowed little since last August in marked contrast to
earlier experiences.

However, most of the rise in interest rates (decline
in bond prices) since the mid-1960s has probably
been a result of a market adjustment to higher and
higher price expectations. With inflationary anticipa
tions, lenders seek to protect the purchasing power
of funds by raising rates, while borrowers pay higher
rates, expecting to repay in depreciated dollars. If
both borrower and lender expect 5 per cent inflation
during the period of the loan, and funds are worth a
real 4 per cent, the interest rate stated in the contract
will be 9 per cent, and existing 4 per cent bonds will

With growth of total spending held to rates approx
imating growth in the nation’s productive capacity,
progress is probably being made at reducing inflation

3 For a discussion of the procedure used to derive these
estimates, see “A Monetarist Model for Economic Stabiliza
tion,” this Review^ (April 19 7 0 ), pp. 7-25, and the “Quarterly
Economic Trends” release of this Bank.

Page 3

FED ER AL RESERVE BANK OF ST. LOUIS

JU LY , 19 7 0

Stock Prices
S ta n d a rd a n d P o or's 5 0 0 C o m p o site
Peaks

100

S e a so n a lly A d iu sted

Peaks =

1
.9 2

110
100

70
-12

-9

-6

-3

M O NTHS TO A N D FROM PEAK
Latest d a ta plotted: Ju ne

fall in market price sufficiently to yield 9 per cent a
year to maturity.4
Prices of highest-grade seasoned corporate bonds
declined (yields rose) 14 per cent from last August
to June. In the corresponding ten-month periods of
the three earlier adjustments, these bond prices rose
5 per cent on average. Monetary restraint was actually
greater in the three earlier periods, as measured by a
slower injection of bank reserves and money. A major
difference between the recent situation and the earlier
p e rio d s

is th a t p r ic e

e x p e c ta tio n s

h ave

a p p a re n tly

continued to be revised upward, while at similar
stages of earlier cycles, when smaller inflations were
more aggressively resisted, price expectations had
already begun to be revised downward.
Stock prices have nearly paralleled the pattern of
bond prices, and possibly for the same reason. As
investors revise their inflationary expectations upward,
the return anticipated from dividends and stock
appreciation increases. When inflationary expectations
go up from, say, 2 per cent a year to 5 per cent, and
yields on bonds go up from, say, 6 per cent a year to
9 per cent, long-run expected stock returns ( dividends
plus appreciation) may go up from, say, 9 per cent
a year to 12 per cent. Because of contracts, regula
tions, inertia, and other rigidities which restrain cor
4“Interest Rates and Price Level Changes, 1952-69,” this Review
(Decem ber 1 9 6 9 ), pp. 18-38. This example ignores the income
tax consideration for both lender and borrower; actually with
the assumptions of 4 per cent real return and 5 per cent
anticipated inflation, the market rate would be higher than
9 per cent.
Page 4

porations from maximizing returns on capital in the
short run, part of this adjustment for existing stocks
may be accomplished in the market by a lowering of
prices. In the long run, however, stock prices will
reflect the inflated cost of resources going into capital
formation.
From last August to June, stock prices (Standard
and Poor’s 500 Composite) fell 20 per cent. After ten
months of the three previous recessions, stock prices
had already risen an average 9 per cent above their
levels at the business cycle peaks. The sharply differ
ent experience apparently cannot be fully explained
by a weaker business situation this time. Corporate
profits after taxes declined at a 14 per cent annual
rate from the third quarter last year to the first
quarter this year. In the corresponding two quarters
in the previous corrections, corporate profits fell at a
28 per cent average rate.
Stocks and bonds are not the only assets that are
affected in value by rising inflation and inflationary
expectations, but more attention is given to these
markets because of widespread availability of frequent
quotations. The value of mortgages and other debts
have declined similarly. The purchasing power of
most pensions has been reduced. Also, lessors (unless
protected by escalators) have suffered a decline in
real estate values. On the other hand, inflation has
given windfall gains to debtors and holders of some
other types of assets, contributing to inequities among
individuals.

JU LY , 1970

FEDERAL RESERVE BANK OF ST. LOUIS

Corporate Profits After Taxes
P e a k s - 100

P e a k s = 100

120

110

110
\

A v e ra g e o f 1959-61, 1956-58 ,
and 19 52-54
*

100

19 68-70

------4

\
/
3RD C)TR 53 \
'
3RD G T R .5 7
✓
2ND )TR. 60
3RD G)TR.'69
---------- 1---------- 1---------- 1---------1---------- 1-----------1
-2

------.1

Q U A R T E R S TO A N D FR O M P EA K
Latest d a ta p lo tted : 1st q u a rte r
So urce: U .S. Departm ent of Com m erce

Costs in Reducing Inflation
Once inflationary expectations become strong, it
is difficult and costly to extinguish them. Commit
ments made on the expectation of continued inflation
become more difficult to fulfill if the inflation is less
than anticipated. When excessive spending is damp
ened, many prices do not move quickly to their
equilibrium levels, and declines in production and
employment result. As noted above, growth of total
spending has slowed since last August to about the
trend rate of growth in capacity. Since overall prices
have continued to rise rapidly, there have been cut
backs in output and production.
The recent slowdown in production is a cost neces
sary to limit price increases. If spending growth con
tinues to be appropriately limited, prices gradually
will rise more slowly, and production will improve as
prices rise less rapidly.
It may be, however, that much of the adjustment in
production to date has merely been a transitional
cost to a fuller anticipation of the inflation. In the
initial stages of accelerating inflation, economic activ
ity receives a stimulus. Individuals and businesses
with greater money balances than they desire to hold
increase their spending even at higher prices, the
greater spending causes businessmen to revise upward
their profit expectations, and investment is expanded.
However, since total spending is excessive, prices are
bid up. Costs are higher and profits lower than ex
pected in real terms. As a result, when the rate of

inflation becomes more fully anticipated, its stimula
tive effects diminish, and growth rates of spending,
production and employment slow to their trend rates,
or even below for a brief adjustment period. In the
following discussion an attempt is made to gain some
insight into the magnitude of production cutbacks,
without attempting to judge whether they are a result
of an adjustment to a higher rate of inflation or are a
result of a burden assumed to place downward
pressure on prices.
Total real output, like total spending, has reacted
much less since last summer than during the three
previous periods of correction. From the third quarter
last year to the second quarter this year, real produc
tion declined at an estimated 1.3 per cent annual
rate. In the first three quarters of previous periods
of adjustment, real output declined at an average 3.4
per cent rate.
Industrial production, like total real product, has
changed much less than in the three recessions. The
decline in industrial production at a 4 per cent rate
from last August to May was much less than during
the first nine months of any of the previous periods
of adjustment, when production fell at an average 14
per cent rate.
Employment trends have been stronger in late 1969
and early 1970 than following the upper turning
points of the three earlier cycles. Since last August,
payroll employment has increased slightly, while in
the corresponding ten months of each of the three
previous correction periods it had declined at an
average annual rate of 3.5 per cent.
A high level of utilization of the potential labor
force is conducive to continued strong upward pres
sure on wages. In June total civilian employment was
equal to 64 per cent of the population of working
Industrial Production
P e a k s = 100

P e a k s - 100

S e a s o n a lly A d ju ste d

105

105
A v e ra g e o f 1 9 5 9-61 ,195 6-58,
and 1952-54

100

100
X\

95
/

\
A IL
IU I £
M A Y ’60
AU G .'69

i
12

1 i
-9

1 i
-6

I
-3

1
0

V
i

1 i
6

- /
i

1 i
9

90
i

85
12

M O N T H S TO A N D FRO M P E A K
La te st d a ta p lo tte d : M a y

Page 5

FEDERAL RESERVE BANK OF ST. LOUIS

JU L Y , 1970

Payroll Em ploym ent
S e a s o n a lly A d ju sted

0 *0
o o

P eaks= 10 0

P eaks;

100

1 9 6 8 -7 0

t
I
ft

i
I
I

100

1
I

A v e ra g e of 1959-61,
1 9 56-58 , and 1952-54

JULY53
JULY'57
M AY60
A U G .69

-12

observe more clearly the effect of Government actions
on the economy. The surplus in this budget is ex
pected to decline only slightly during the summer
and fall.
The fiscal restraint since the end of 1968 has been
achieved, in large measure, by a cutback in defense
spending. National defense outlays have declined at
a 0.4 per cent annual rate since the fourth quarter of
1968, after rising 13 per cent annually in the four
previous years. In the first half of 1970, defense
spending amounted to less than 8 per cent of total
gross national product, compared with an average of
9.4 per cent from 1957 through 1963. Nondefense

M O N T H S TO A N D FR O M P E A K
La te st d a ta p lotted: Ju ne
So u rce : U .S . D e p a rtm en t o f L a b o r

force age (16 through 64). In the sixteen years from
1950 through 1965 this ratio never exceeded 63.5 and
declined to as low as 60. A somewhat lower utilization
of the labor force is likely in the near future even if
total production rises somewhat, since productivity
gains and growth of population of labor force age
will provide for some increase in output.
Construction is one area where cutbacks have been
as great or greater than in the three previous reces
sions. It may be that construction is being adversely
affected much more from the increasing inflation than
from the efforts to reduce inflation. Construction has
been hurt more than most industries by rising labor,
material, and land prices. Since large amounts of
long-term borrowed funds are used in purchasing
homes and other buildings, construction has also been
affected seriously by the higher interest rates, result
ing from the rising price anticipations. Construction
has suffered further from heavy financial disintermedi
ation (resulting from Regulation Q ceilings and similar
rules), and from state usury laws which have favored
large businesses and others who can obtain funds in
the free capital markets.

Recent Stabilization Actions
In implementing the gradual anti-inflationary pro
gram of the Government, fiscal actions have been
moderately but steadily restrictive in 1969 and 1970.
Since the first quarter of 1969, the high-employment
budget surplus, as estimated by this bank, has been
in the $7 to $11 billion range. This measure, unlike
other measures of Federal Government fiscal devel
opments, excludes most of the effect on the budget
of changing levels of real economic activity, so as to
Page 6

expenditures have risen at an 8 per cent rate since the
fourth quarter of 1968, following a 12 per cent rate
in the previous four years. On the other hand, the
Government, by removing the surtax in two steps,
January 1 and July 1, 1970, took partially offsetting
expansive actions.
The current fisoal restraint, as measured by the
high-employment surplus, is much milder than during
the 1959-61 period of correction and, relative to the
size of the economy, is even less than during the
1956-5S period. The 1953-54 adjustment, which was
the longest period of correction reviewed here, oc
curred paradoxically at a time when the budget was
expansive.

FEDERAL RESERVE BANK OF ST. LOUIS

JU LY , 1970

Indications are that Federal budget requirements
will place large demands on money and capital mar
kets in coming months. The Government’s official
budget, in contrast with the high-employment budget,
is sliding into deficit because of a marked slowing in
tax collections. When this factor is added to the
planned activities of Government agency and loan
guarantee operations, the Federal Government’s de
mand for funds (both direct and indirect) in fiscal
1971 appears likely to be the largest since fiscal 1968.
Monetary authorities also have followed a compara
tively moderate course in resisting inflation. Monetary
action, as measured by growth of the money stock,
was restrictive from early 1969 to February 1970. In
the first half of 1969 money rose at a 4 per cent annual
rate, down from a 7 per cent rate in the two previous
years. From June 1969 to February 1970 the money
stock was virtually unchanged.
This recent monetary restraint was more moderate
than during the other periods of correction, probably
contributing to the mildness of the current adjustment.
On average the money stock in the earlier periods
remained on a plateau from ten months before the
peak until six months after the peak.
Since February, money has risen at a very rapid
7 per cent annual rate. This is much faster than during
the relaxation periods following past periods of eco
nomic correction, and it began sooner; that is, the
sixth month after the peak, compared with an average
of nine months after the previous peaks. The growth
in money since February approximates the expansive
growth in early 1967.
M o n ey Stock
P e a k s = 100
104

P e a k s - 100
104

S e a s o n a lly A djusted

103

102

102
A v e ra g e o f 19 59-61,1956-58

101

100

___ d
9

S ' :

101

100

s '
A

/1 9 6 8 -7 0

Y'53
JULY'57
M A Y 60
AUG/69

97
96

-12

-6

-3

M O N T H S T O A N D FR O M P E A K
Latest d a ta p lotted: a v e ra g e of fo ur w e e ks ending Ju ne 2 4 ,1 9 7 0

Conclusions
Inflation has been accelerating since the end of
1964. Actions taken to resist the inflation have been
more carefully applied than during previous periods
of economic correction. As a result, total spending has
continued to rise at a near long-run optimum growth
rate. Prices have continued to rise rapidly, and pro
duction has declined slightly.
Continued price increases are disheartening, espe
cially when there is growing slack in productive
capacity. However, in view of the strong upward
momentum built into the price structure by the
expansive fiscal and monetary actions from 1964
through 1968, and in view of the moderate character
of the policy steps taken to resist the inflation, it is
unlikely that a substantial improvement will materi
alize for a considerable period. A more aggressive
attack on inflation might have produced quicker re
sults, but at the expense of harsher transitional costs
in terms of real product, employment and profits.
The current inflation and the struggle against it
have been accompanied by costs. Production has
declined, construction has been depressed, growth in
employment has slowed, and stock and bond prices
have fallen. Questions have been raised as to whether
the cost of even the gradual approach in reducing
inflation is too great. Yet, many of these supposed
costs of fighting inflation are, in fact, the result of
the economy adjusting to higher expected levels of
inflation. If spending continues to rise moderately,
as it has for a year, some of these costs of adjusting
to greater expected inflation should soon subside. On
the other hand, costs involved in actually reducing
the strong inflationary anticipations, which have prob
ably been moderate, may intensify and continue for
some time.
There is some evidence that the battle against
inflation may be postponed again as in 1967. Spokes
man for those hurt seek renewed economic stimula
tion, without distinguishing whether the pain has
come from adjustments to higher rates of expected
inflation or from adjustments to lower rates. Pressures
are building to expand Government outlays, monetary
expansion has been rapid since February, and un
realistic hopes are being placed on attempts to talk
prices down. Each time a final showdown with infla
tion is postponed, the total costs of adjusting, first to
a still higher rate of expected inflation and ultimately
to a lower rate, become greater.
Page 7

Metropolitan Area Growth:
A Test of Export Base Concepts
by CLIFTON B. LUTTRELL and CHARLES M. GRAY

Economists have developed two different views of urban growth. One view holds
that growth stems from increased demand for a city’s output for export. This leads to
expansion o f employment in the exporting sector and to a multiple expansion of other
employment. The other view is that migration to a city, which expands the supply of
labor, leads to increased employment and economic growth.
Although the two views are not mutually exclusive, most studies o f urban growth
lean toward the former approach. This article concentrates on the record of nine Cen
tral Mississippi Valley metropolitan areas during the 1960’s, and finds that emphasis on
the export base view to the exclusion of other factors leaves much of the growth proc
ess unexplained.

j^^_LL Standard Metropolitan Statistical Areas1 in
the Central Mississippi Valley made gains during the
1960’s, as indicated by commonly used measures of
economic activity. Employment in the nine metro
politan areas combined rose at the annual rate of 2.9
per cent from 1960 to 1968. Population rose at a 1.4
per cent rate from 1960 to 1968, and per capita per
sonal income rose at a 3.1 per cent rate in the nine
years ending in 1968. Employment and per capita
personal income gains exceeded the national rates
of 2.6 and 2.9 per cent, respectively, while population
growth was at a somewhat lower rate than the na
tional average of 1.6 per cent.

nual rate in St. Louis to 4.6 per cent in Texarkana.
Population gains ranged from two-tenths of one per
cent in Evansville to 2.2 per cent in Little Rock. Per
capita income corrected for price changes rose at
only a 2 per cent annual rate in Fort Smith, com
pared with 6.4 per cent in Texarkana. These wide
variations of movement in growth indicators among
regional SMSAs and between the regional and na
tional SMSA average raise questions as to what con
stitutes a meaningful concept for measuring SMSA
progress, and why such variations occur.

Although each of the regional SMSAs made gains
in most measures of economic activity, the rates of
growth among the areas differed widely. Em
ployment increases ranged from a 2.3 per cent an

Economic analysts generally recognize two broad
categories of growth: volume or aggregate growth,
and growth in economic well-being. Aggregate gains,
such as population increases, higher gross output, and
increases in total demand for goods and services, may
have no relationship to individual welfare. There may
be no direct relation, for example, between popula
tion growth and efficient operations of the competitive
market or output of goods and services per per
son. India, Pakistan, and Egypt have had a high rate
of population growth, but these nations are not noted
for high rates of progress in well-being. Some ele
ments of the local economy, such as employers, re-

1Standard Metropolitan Statistical Areas (SMSAs) consist
primarily of one or more whole counties containing at least
one central city of 50,000 population or more. SMSAs studied
in this article are as defined by the Bureau of the Budget in
April 1967 and are the same geographic areas for the period
studied.
This study includes the Central Mississippi Valley (C M V ),
composed of the whole states of Arkansas, Kentucky, Missis
sippi, Missouri, and Tennessee, and also includes all other
SMSAs in the Eighth Federal Reserve District (see map on
facing page).
Page 8

Meaning of Growth

JU LY , 1970

FEDERAL RESERVE BANK OF ST. LOUIS

THE EIGHTH
FEDERAL RESERVE DISTRICT
Showing A djo in in g Counties and States

LEGEN D
District B o u n dary
------

State B o u n d aries
County B o u n d aries
H e a d O f f i ce of the F e d er al
Re se rv e B an k of St. Louis
Branch O f f i ce of the Fe d er a l
Re s e rv e Bank of St. Louis
S t a n d a r d Metropolitan
Statisti cal A r e a
Scal e in Mi l es
100
200

Page 9

FEDERAL RESERVE BANK OF ST. LOUIS

tailers, owners of idle resources, and new immigrants
may benefit from population gains. Other groups,
however, who may have already paid for such capital
items as schools, parks, public buildings, and churches,
may be called upon to share their resources with the
newcomers or to shoulder additional expenses as a
result of rapid population growth. If new residents
are unskilled, they may make disproportionately
large demands upon the public sector, while their tax
contributions are small.2
In contrast to volume growth, a rise in material
well-being, as indicated by real per capita income
gains, is applauded by most students of economic
development. Growth in well-being may be indicated
by rising real per capita income and rising per capita
consumption of goods and services. These factors
point to greater efficiency in the production and
marketing of goods and services in an area.
A relatively high rate of employment growth may
also indicate rising well-being. Assuming average la
bor force growth, if jobs are created faster in a par
ticular area than in other areas, labor is bid away
from current occupations elsewhere, or new em
ployees are bid into the labor force. Other things
being equal, the fact that employers in an area can
profit by hiring such labor indicates a higher rate of
gain in productivity here than elsewhere.
Although gains in real per capita income and rela
tively high rates of employment growth in an area
indicate improvement in well-being, these measures
provide no explanations of growth. Such analyses tell
little about how progress starts and accelerates. For
example, how does an area or region develop en
trepreneurs and reorient itself from a static economy
to one built around capital growth, labor specializa
tion, flexible use of resources, and wider commercial
exchange of goods and services?

Export Base Concepts
The export base approach to urban and regional
growth analysis focuses attention primarily on the
demand for goods and services from outside the local
economy.3 Local industries which have a large out
2The ultimate desirability of immigration thus depends on
whether those who stand to gain as a result can in some way
compensate those who stand to lose. This criterion is treated
extensively in the literature of “welfare economics,” and
further discussion of the problem can be found in George H.
Borts and Jerome L. Stein, Economic Growth in a F ree Mar
ket (New York: Columbia University Press, 1 9 6 4 ), pp.
190-193.
3Another concept of urban growth is founded on the observa
tion that a city grows through a series of separable stages.
Page 10

JU L Y , 1970

side market are more responsive to changes in na
tional demand than those with output limited to the
local market, and are collectively termed the “export
base.” The group of industries which develops to
service the export base and the local populace, and
which consists largely of wholesaling and retailing
establishments along with services and certain types
of light industry, is termed the “nonbasic” sector. A
rough line of dependence can be constru ed, leading
from outside demand, to the base, and then to the
domestic sector. If an assumption is made that the
nonbasic sector maintains a constant relationship to
the basic sector over time, then it can be shown that
total employment growth is a multiple of basic em
ployment growth.4
As a refinement of the export base theory, Stanislaw
Czamanski devised a method of separating the total
employment of an SMSA into three sectors.6 His clas
sifications have been used in this article. Industries
located in an SMSA primarily because of locational
advantages in a national market are called geograph
ically-oriented industries. Industries in this sector in
clude: coal mining, petroleum and gas extraction,
primary metals industries, motor vehicles and equip
ment, machinery, meat products, and Federal Gov
ernment operations. Employment in this sector is
designated E g in this article.
A second class of industries includes those which
locate in an SMSA to provide inputs to the geographically-oriented industries, to utilize outputs of that
sector, or to take advantage of economies resulting
from the prior location of geographically-oriented inThe products of various industrial sectors are assumed to have
different income elasticities of demand so that a secular in
crease in income leads to a shift in sectoral prominence.
Although demand plays a role, the chief emphasis is on the
ability of the locality to supply factors of production. Further
discussion of this approach can be found in Wilbur R.
Thompson, A Preface to Urban Economics (Baltimore: The
Johns Hopkins Press, 1 9 6 9 ), especially pp. 15 ff., and Harvey
S. Perlolf et al., Regions, Resources, and Economic Growth
(New York: Cambridge University Press, 19 6 0 ), pp. 58-60.
4The idea of such a multiplicative effect within a region
received impetus from the “investment multiplier” hypothe
sized by J. M. Keynes in T he General Theory of Employment,
Interest, and Money (New York: Harcourt, Brace & Co.,
19 3 6 ), especially p. 115. Perhaps the most complete statement
of this theory can be found in Ralph W . Pfouts, ed., T he
Techniques of Urban Economic Analysis (W est Trenton, N. J.:
Chandler-Davis Publishing Co., 1 9 6 0 ), which includes an
extensive treatment of export base analysis. A recent statement
of the importance of exports is in Jane Jacobs, “Strategies
for Helping Cities,” American Economic Review, September
1969, pp. 652-656.
®Stanislaw Czamanski, “A Model of Urban Growth,” Papers,
Regional Science Association, (1 9 6 4 ), pp. 177-200; and “A
Method of Forecasting Metropolitan Growth by Means of
Distributed Lags Analysis,” Journal of Regional Science,
(1 9 6 5 ), pp. 35-49.

FEDERAL RESERVE BANK OF ST. LOUIS

dustries in the area. This complementary
sector displays a strong dependence upon
the geographically-oriented sector and is also
responsive to national demand. Employment
in this sector is designated E c. Typical in
dustries include knitting mills, other textile
mills, petroleum and coal products, and rub
ber products.
Finally, the urban-oriented sector consti
tutes that group of industries which arises
to service the urban area. Employment in
this sector is designated E u.6 Included are
such industries as construction, bakery prod
ucts, printing and publishing, wholesale and
retail trade, banking, finance, insurance,
laundry and cleaning, hotels, recreation, ed
ucation, welfare and religious organizations,
and local government.

JU LY , 19 70

Table I
P O P U L A T IO N

IN C M V

M E T R O P O L IT A N

AREA S,

1 9 5 0 -6 8

Average Annual Rates
_______ of Change
1950-60
1960-68

SMSA

Thousands of Persons
1950
1960
1968

Evansville
Fort Smith
Little Rock
Louisville
Memphis
Pine Bluff
St. Louis
Springfield
Texarkana
Total CMV
SMSAs
Total U.S.
SMSAs

213
142
221
577
530
76
1,755
105
95

223
135
272
725
675
81
2,105
126
92

227
156
323
802
770
87
2,326
145
106

0.5%
- 0 .5
2.1
2.3
2.4
0.6
1.8
1.8
- 0 .3

3,714

4,434

4,942

1.8

1.4

93,998

118,968

134.81 71

2.4

1.6

U. S. Total

151,326

179,323

201,921

1.7

1.3

0.2%
1.8
2.2
1.3
1.7
0.9
1.3
1.8
1.7

P ro je cte d on basis of 1966 data and 1967-68 growth rate fo r 100 largest SMSAs.
Source: Department of Commerce, Bureau of the Census, 1950 Census of Popula
tion; Current Population R eports: Estimates o f the Pojmlation of 100 Large
Metropolitan A reas: 1967 and 1968, Series P-25, No. 432, October 3, 1969;
Current Population R eports: Estimates of the Population o f Counties
and Metropolitan Areas, July 1, 1966, Series P-25, No. 427, Ju ly 31, 1969 ;
and telephone conversation with staff of Office of Business Economics,
U .S. Departm ent of Commerce.

A central purpose of this sectoral divi
sion is to provide a means for using the
export base theory to estimate future growth
of an urban area. The following is an application of
the theory with Czamanski’s sectoral division adapted
to each metropolitan area in the CMV states.

St. Louis

eral government, aircraft and parts, and ordnance
were among the major growth sectors within the Eg
classification. Employment declines occurred in meat
packing, leather, and some other nondefense industries
in this classification.

The St. Louis area, with a 1968 population in excess
Complementary employment (E c), which account
of 2.3 million, is the largest metropolitan center in
ed for less than 4 per cent of the area total, actuthe CMV (Table I). Like other large, older
metropolitan areas in the nation, St. Louis
Table II
has had a relatively low employment growth
E M P L O Y M E N T G R O W T H IN C M V M E T R O P O L IT A N A R E A S ,
rate (Table II). The rate of 2.3 per cent in
1 96 0-68
the period 1960-68 was the smallest among
(Average Annual Rates of Change)
the CMV metropolitan areas and was below
UrbanGeographicallythe average for major labor market areas in
Oriented
Total
Complementary
Oriented
Employmei
Employment
SMSA
Employment
Employment
the United States, which grew at a 2.6
(Eg)
(Ec)
(Eu)
(E )
per cent rate. Likewise, St. Louis had
Evansville
2.7%
4.7%
2.5%
2.9%
a relatively low growth rate in geographi
Fort Smith
0.4
5.5
4.3
4.0
cally-oriented employment (E g), which ac
Little Rock
4.5
0
3.1
3.3
Louisville
4.4
6.4
2.4
3.2
counts for more than one-fifth the area total
Memphis
7.3
1.9
3.6
3.8
(Table III). Only Fort Smith, with a rate
Pine Bluff
3.5
1.0
4.6
3.9
St. Louis
2.0
—0.5
2.6
2.3
of 0.4 per cent, was below St. Louis. FedSpringfield
2.5
9.1
3.7
4.3
6The sectors in Czamanski’s analysis are not uni
formly defined for every size SMSA. Fo r example,
a producer of furniture may locate in a large
SMSA because of related industries there which
provide economies of production. In this case
the producer would be in the complementary
sector. In a very small SMSA, however, a similar
producer may supply a large geographical area
without benefit of closely related industries. In
this latter case it would be classified in the
geographically-oriented industries. Allowances of
this sort have been made wherever possible in
this article.

Texarkana
Average CMV
SMSAs
Major Labor
Market Areas*

10.9

8.4

1.4

4.6

3.3

2.8

2.9
_____ 2.6

*128 Areas
Source: Employment by industrial classification obtained from respective state
employment agencies, and U. S. D epartm ent of Labor, Bureau of Labor
Statistics, Employment and Earnings, various issues for 1960-69. Employ
ment summarized by sectors according to Stanislaw Czamanski’s classifi
cation in “A Model of Urban Growth,” Papers, Regional Science
Association, (1964), pp. 177-200.

Page 11

Employment Trends - Central Misissippi Valley Metropolitan Areas
Ratio S c a l e
1960=100
180

Ratio S c al e Ratio S c a l e
1960=100 1960=100
180 180

St. Louis, Missouri

Ratio S c a l e Ratio S c a l e
1960=100 1960=100
180 180

Evansvi , Indiana

Ratio Sc al e
1960=100
180

Fort Smith, A rkan sas
Ec

150

-------

Eg
•

150

"__

, - «^

150

it.

——’

150

—— E

— "

*’

100

90
80

Little Rock, A rkansas

Memphis, Tennessee

200

V
•

150

150
•

150

/
* —

_
100

/
Ec

1960

1961

1962

1963

1964

1965

1966

1967

1968 1969

E-Total Employment

E c -Complementary Employment

Eg-Geographically-Oriented Employment

E u -Urban-Oriented Employment

Page 12

I9 6 0

1961

1962

1963

•

200
;

.*>_

150

•

\
\

150

t.
s

150

250

Ev•

200 200

—^

Texarkana, A rk a n sas

Springfie , Missouri

/
100

100 100

•/

196 1965

1966

1967

1968

1969

90
80
1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

'C o n siste n t data not a v a ila b le for period 1960 - 1963.

Page 13

JU L Y . 1970

FED ER AL RESERVE BANK OF ST. LOUIS

Table III
E M P L O Y M E N T IN C M V M E T R O P O L IT A N
BY SEC T O R , 1 960 an d 1968
Total Employment*

(E)

Per Cent Employed in Each Sector
GeographicallyOriented
Employment

Complementary
Employment

UrbanOriented
Employment

(Eg)

(Ec)

(Eu)

1960

1968

1960

1968

1960

1968

1960

1968

75 .7
3 5.7
101.4
242.1
191.1
17.8
733.6
37.0
33.7

95.3
48 .7
131.8
311.2
258.0
24.1
880.8
52.1
48.3

15.3%
16.3
22.3
17.3
9.3
28.1
24.0
7.6
24.6

15.0%
12.3
24.4
19.0
12.1
27.4
23.5
6.5
39.3

16.9%
14.6
3.5
9.9
11.2
13.5
4.4
11.9
3.3

19.4%
16.4
2.7
12.6
9.6
10.8
3.5
16.9
4.3

67.8%
69.2
74.2
72.8
79.6
58.4
71.6
80.5
72.1

65.6%
71.3
73.0
68.4
78.3
61.8
73.0
76.6
56.3

SMSA
Evansville
Fort Smith
Little Rock
Louisville
Memphis
Pine Bluff
St. Louis
Springfield
Texarkana

AREA S

higher growth rate of urbanoriented industries.7 Employ
ment in these urban-oriented
industries, almost three-fourths
of total employment, rose at a
2.6 per cent annual rate. Many
service-type industries benefit
from the high rate of spending
by employees in the exporting
sector.

Population in St. Louis grew
at a 1.3 per cent rate during
1960-68, slightly below the
rate for the CMV metropolitan
area total and below the 1.6
per cent rate for all United
Total CMV
States SMSAs (Table I). Pop
SMSAs
1,468.1
1,850.3
19.9
20.5
7.3
72.9
72.1
7.5
ulation growth in St. Louis,
♦Thousands.
however, was about the same
Source: Employment by industrial classification obtained from respective state employment agencies,
as in other larger centers. Such
and U. S. Department of Labor, Bureau of Labor Statistics, Employment and Earnings,
various issues for 1960-69. Employment summarized by sectors according to Stanislaw
centers have in recent years
Czamanski’s classification in “A Model of Urban Growth,” Papers, Regional Science Asso
ciation, (1964), pp. 177-200.
grqwn at slightly lower rates
than medium-sized areas. For
ally declined in the 1960-1968 period. Part of this
example, SMSAs with a population of two million or
decline in E c can probably be accounted for by the
more grew 1.4 per cent per year during the period
major shifts in the type of geographically-oriented
1960-66, while those with populations of two hundred
industries located in the area. Those which declined
thousand to two million grew 2 per cent per year.8
were more likely to attract complementary industries
According to export base theories, the lower-thanthan those which gained in employment. For example,
average rate of population growth in St. Louis is
nondefense industries, such as meat packing and
consistent with a lower rate of job creation. Causation
leather, can be expected to attract some closely allied
is viewed, however, as running from job creation to
industries. On the other hand, defense industries may
population growth. This view excludes the possibility
not be subject to the same degree of competition as
of reverse causation. The results of a study of 135
nondefense industries, and may not be forced to be
cities by Richard Muth indicated that migration and
quite so cost conscious. Hence they may not attract
employment growth both affect and are affected by
such complementary industries as suppliers of com
each other.9 Thus the low rate of job creation may
ponent parts to the area.
not have been a predominant cause of the slow popu
lation growth in St. Louis. Immigration may have re
The large growth in Federal Government and de
sulted in the low rate of job creation, or other factors
fense employment may have had some retarding in
such as inefficiency of production could have caused
fluence on the more market-oriented industries in St.
both the low rate of job creation and of population
Louis. One reason may be the fact that the more
growth.
rapidly growing geographically-oriented defense in
Per capita personal income growth in St. Louis was
dustries in St. Louis generally pay above-average wage
consistent with the below-average rate of job and
rates for the area. These locally high wages may re
population growth for the area (Table IV ). Such in
duce the competitive ability of other exporting indus
come rose over $600 per person during the period
tries in this labor market. Such nondefense exporting
1959-68, approximating the average dollar increase
industries sell part of their output in regional, na
7See Table V, equation 1 for the impact of Eg on total
tional, or international markets and must compete with
employment and other relationships relative to “export base”
products from other labor market areas where wages
assumptions for each of the CMV metropolitan areas.
8U.S. Department of Commerce, Bureau of the Census, Series
may be determined more competitively. Conversely,
P-25, No. 427, July 31, 1969.
high wage rates in St. Louis geographically-oriented
9See Richard F . Muth, “Migration: Chicken or E gg?” (W ork
industries may have contributed to the somewhat
ing paper, Washington University, 19 6 9 ).
Page 14

JU LY , 1970

FEDERAL RESERVE BANK OF ST. LOUIS

Table IV
PER C A P IT A P E R S O N A L IN C O M E IN
C M V M E T R O P O L IT A N A R E A S , 1 9 5 0 - 6 8
SMSA

Income in Constant Dollars*
1968
1950
1959

Evansville
Fort Smith
Little Rock
Louisville
Memphis
Pine Bluff
St. Louis
Springfield
Texarkana
Average CMV
SMSAs
Average U.S.
SMSAs

1,814
1,121
1,554
1,965
1,690
1,036
2,228
1,688
1,206

1,922
1,559
1,903
2,230
1,760
1,430
2,444
1,924
1,445

2,765
1,856
2,572
2,965
2,446
2,025
3,112
2,394
2,515

Annual Rates of Change
1959-68
1950-59
0.6%
3.7
2.3
1.4
0.5
3.6
1.0
1.5
2.0

4.1%
2.0
3.4
3.2
3.7
3.9
2.7
2.5
6.4

ployment totaling 11.5 thousand, almost
three-fourths of the E g total in 1966, de
clined to 11.1 thousand in 1969. Employ
ment in mining declined from 1.9 to 1.6
thousand. A slight increase in Federal Gov
ernment employment was insufficient to
offset these declines.

Complementary employment, amounting
to 18.5 thousand in 1968 or almost one-fifth
the total, consists largely of employment in
furniture and fixtures, rubber and plastics,
fabricated metals, and other miscellaneous
2,841
1.2
3.1
2,164
manufacturing industries. Employment in
1,939
the
rubber and plastics industry is relatively
1.2
2.9
2,409
3,113
2,166
new for the area, beginning in early 1966
♦Converted to 1958 dollars using GNP Price Deflator. Income figures are on
with 2.5 thousand workers, and expanding
“where received” basis.
to 3.1 thousand in 1968. Some expansion
Source: U .S . Department of Commerce, Office of Business Economics, “ Personal
Income in Metropolitan and Nonmetropolitan Areas,” Survey of Current
occurred during the 1960-68 period in furni
Business, May 1970.
ture and fixtures, fabricated metals and mis
cellaneous types of E c employment. The period
for all metropolitan areas in the CMV. With a rate
1964-67 was one of especially rapid employment
of increase of 2.7 per cent per year, however, the
growth in these industries.
gain here was at a lower rate than for most CMV
metropolitan areas and somewhat below the weighted
Population in Evansville was virtually unchanged
average national SMSA rate of gain. Despite this befrom 1960 to 1968 and grew only 0.5 per cent per
low-average rate of gain, personal income per capita
year in the prior decade (Table I). In the 1950’s the
in St. Louis of $3,112 in 1968 was well above the
city lost two industries which were a major portion of
average for all other SMSAs in the CMV states, and
all geographically-oriented employment. As a result,
about equal to the national average for all metropoli
the unemployment rate at the turn of the 1960 decade
tan areas.
was relatively high, averaging more than 7 per cent
of the labor force. In comparison, unemployment
rates
ranged from 4.1 to 6.8 per cent of the labor
Evansville
force in the four larger metropolitan areas in the CMV.
Evansville, a medium-sized SMSA in the CMV
Furthermore, unemployment in Evansville remained
states, has made gains in recent years equal to the
somewhat above average for other regional SMSAs
CMV average and slightly greater than the national
during most of the 1960 decade. This relatively high
SMSA average in employment, below average for both
unemployment rate was probably a factor in the low
in population, and above average in personal income
rate of population growth in Evansville.
(Tables I, II, IV).
Per capita income growth in Evansville has been
at
a relatively high rate during recent years, averag
Geographically-oriented employment rose at the
ing
4.1 per cent from 1959 to 1968 (Table IV ). This
rate of 2.7 per cent. Such employment rose sharply
was
the highest rate of gain of all the CMV metro
from 1961 to 1964, at a somewhat slower rate from
politan
areas except Texarkana. In the previous dec
1964 to 1966, and declined on balance from 1966 to
ade,
however,
per capita income in Evansville grew
1968. With moderate time lags, E c and E u employ
at
the
relatively
low rate of 0.6 per cent. Much of this
ment generally followed the Eg trend. Employment
disparity
can
be
traced to the major loss of industries
in these sectors accelerated after 1962 and tended to
in
the
1950’s
and
the resulting high unemployment
level out after 1967.
rates at the end of the decade. With the proportion
The decline in E g after 1966 was the result of
of the population employed down, per capita incomes
reductions in machinery manufacturing industries and
were relatively low at the turn of the decade. Con
mining. Employment in this sector of 15.3 thousand
versely, with a higher proportion of the population
in 1966 accounted for almost one-sixth of total em
employed in 1968 (unemployment rate of 3.3 per
ployment in the SMSA. Machinery manufacturing em
cent), real per capita income was up sharply.

Page 15

JULY, 1 9 7 0

FEDERAL. RESERVE BANK OF ST. LOUIS

Despite the low rate of gain in the prior decade,
the per capita personal income of $2,765 in 1968 was
relatively high for regional SMSAs. It was exceeded
in the CMV only by St. Louis and Louisville, but it
was still about 10 per cent below the United States
SMSA average.

Fort Smith, Arkansas

—

Oklahoma

Both employment and population in Fort Smith
increased from 1960 to 1968 at higher rates than the
regional or national SMSA averages (Tables I and
II). Total employment rose 4 per cent per year com
pared with an average of 2.9 per cent for all regional
SMSAs and 2.6 per cent for 128 major national labor
market areas. Population rose at a 1.8 per cent rate,
higher than most other regional SMSAs and well
above the rate of 1.6 per cent for all U. S. SMSAs.
The highest rate of employment gains was in the
complementary sector, which currentiy constitutes
about 16 per cent of the total (Table III). Employ
ment in this sector grew 5.5 per cent per year, most
of which is attributed to expansion in furniture manu
facturing. Employment in this industry totaled 5,200
in 1968 or more than 60 per cent of the sector total.
Geographically-oriented employment grew only 0.4
per cent per year. Employment in this sector was
almost stable from 1963 to 1968, but by 1969 employ
ment in metals industries had risen by about 800
workers, increasing total employment in the sector by
about 10 per cent. Metals industries currently account
for about 60 per cent of Eg in the area; Federal
Government, 25 per cent; and mining and stone, clay,
and glass industries, the remaining 15 per cent.
Urban-oriented employment in Fort Smith in
creased at the relatively high rate of 4.3 per cent
from 1960 to 1968. This sector accounts for 71 per
cent of all jobs in the area, about the average per
cent for the region.
Employment growth trends in Fort Smith reflect
the closing of a large military base in the area. The
dismantling of this base and the replacement of mili
tary by civilian personnel apparently altered labor
demand sufficiently to have a sizeable impact on
employment in trade, t r a n s p o r t a t i o n , and
construction.
Population growth in Fort Smith exceeded most
other CMV metropolitan areas during the years
1960-68, despite the dismantling of the military in
stallation. The sharp increase after 1960 probably in
dicates migration from nearby counties to the Fort
Page 16

Smith SMSA. Population in the SMSA, which com
prises four counties, declined during the 1950’s as a
result of rural migration to other parts of the nation.
A relatively low per capita income increase per
year occurred in Fort Smith from 1959 to 1968 along
with high rates of employment and population growth
(Tables I, II, and IV). Average per capita personal
income rose only 2 per cent per year, below average
for SMSAs in the region and below the 2.9 per cent
average rate for all SMSAs in the nation.

Little Rock
Employment in Little Rock grew 3.3 per cent per
year during the period 1960-68. This was slightly
above average for both the regional SMSAs and ma
jor national labor markets (Table II).
Geographically-oriented employment, which now
accounts for one-fourth the total for the area, grew
at the relatively high rate of 4.5 per cent. This growth
represents primarily the expansion of one firm en
gaged in making fabricated steel and aluminum prod
ucts. Complementary employment, which was already
low at the beginning of the decade, declined further
as a percentage of total employment during the
period (Table III).
Urban-oriented employment, which accounted for
73 per cent of the total, grew at a 3.1 per cent rate.
Employment in this sector is heavily weighted by
wholesale and retail trade, construction, financial
agencics, local government, and services.
Population in Little Rock grew 2.2 per cent per
year from 1960 to 1968, the highest rate of all re
gional SMSAs and well above the national SMSA
average (Table I). Population growth was also above
average for the region in the prior decade. This
higher-than-average rate of population growth in re
cent years may reflect the fact that a high rate of
industrialization and migration from the farms oc
curred later in Arkansas than in most other states of
the CMV. These trends were having an important
impact on regional SMSA population growth after
they ceased to have a major impact on SMSA growth
in other regions.
Per capita personal income in Little Rock grew at
above-average rates for regional and national SMSAs
in both the recent and prior decades (Table IV).
Such income in Little Rock grew at a 2.3 per cent
annual rate in the 1950’s and a 3.4 per cent rate from
1959 to 1968. In 1950 per capita personal income in
Little Rock was only 80 per cent of the regional

FEDERAL RESERVE BANK OF ST. LOUIS

SMSA average, but in 1968 had risen to 91 per cent.
This rapid increase of income growth, coupled with
relatively high population and employment growth
rates, indicates a substantial rise in production effi
ciency and a sharp increase in demand for labor in
the Little Rock SMSA.

Louisville
Total employment in the Louisville SMSA grew at
a rate of 3.2 per cent from 1960 to 1968, exceeding
the average for SMSAs in the region and for large
national labor markets (Table II). Employment gains
of 4.4 per cent per year in the geographically-oriented
sector were also relatively high, exceeding all other
SMSAs in the region except Little Rock, Memphis,
and Texarkana. This sector, which constitutes almost
one-fifth of total employment in the area, is heavily
weighted by machinery manufacturing employees.
Such employees, which account for about one-half
the Eg total, rose from 20 to 27 thousand during the
six-year period 1963-69.
Although employment in all three sectors rose, the
increase of 6.4 per cent per year in complementary
employment (13 per cent of the total) was especially
rapid. Gains in this sector after 1965 were heavily
weighted by increases in the manufacture of electric
appliances. These increases are attributed largely to
the decision of one firm to establish a major manu
facturing center in Louisville. Small E c increases oc
curred in lumber and wood products, chemicals, and
other nondurables, which were about offset by de
clines in employment in fixtures, apparel, and re
lated products.
Employment in urban-oriented occupations, which
account for 68 per cent of the total, rose somewhat
less than average for SMSAs in the region and sub
stantially less than the other sectors in Louisville.
Modest growth occurred, however, in all types of E u
occupations, including services, trade, finance, trans
portation, local government, fabricated metals, food
and kindred products, and publishing.
Population in Louisville, the second largest SMSA
in the region, grew at a below-average rate for
regional and national SMSAs in the period 1960 to
1968, which was inconsistent with the high rate of
employment growth. Louisville, however, had a rela
tively high rate of population growth for the region
during the prior decade, averaging 2.3 per cent per
year, the second highest rate among the regional
SMSAs and almost equal to the national SMSA aver
age of 2.4 per cent (Table I).

JU LY , 1970

Per capita personal income in the Louisville area
is the second highest of all SMSAs in the CMV
states, averaging $2,965 (Table IV). Such income
was slightly above the Evansville average, but was 5
per cent below the St. Louis and national SMSA
average. Per capita income in Louisville rose 3.2 per
cent per year from 1959 to 1968, slightly above the
regional SMSA growth rate and exceeding the na
tional SMSA average. Such income growth in the
prior decade exceeded both the regional and national
SMSA average.

Memphis
Employment in the Memphis SMSA grew at an
annual rate of 3.8 per cent, greater than both regional
and national SMSA average rates in the 1960’s (Table
II). Growth occurred in all three employment sec
tors, with especially sharp gains percentage-wise in
geographically-oriented employment. Growth in this
sector stemmed from a relatively small base and re
flects primarily the establishment of a new electric
appliance plant employing about six thousand people,
almost doubling E g in the area.
In contrast to rapid E g gains, growth in the com
plementary sector was at the relatively low rate of
1.9 per cent. This sector is likewise relatively small,
accounting for less than 10 per cent of total employ
ment in the area.
Employment in Memphis is primarily urban-ori
ented with E u constituting 78 per cent of the total
(Table III). Growth of 3.6 per cent in this service
area was well above average for the region. The city
developed historically around wholesale and retail
trade designed to serve both the local urban area
and the smaller communities over a large trade area.
Despite the recent sharp upturn of E g, the service
sector declined only slightly relative to total employ
ment. Wholesale and retail trade still provide about
one-fourth of the area’s jobs, while other urban type
services, such as local government, finance, transporta
tion, construction, food processing, fabricated metals,
and printing and publishing, provide the remaining
55 per cent.
Population growth in Memphis was well above the
regional SMSA average and slightly higher than the
national rate from 1960 to 1968. Population growth
here of 1.7 per cent per year was exceeded only by
Fort Smith, Litde Rock, and Springfield, and was
equal to Texarkana in the region (Table I). During
the prior decade this growth in Memphis exceeded
all other SMSAs in the region. The high rate of popu
Page 17

FEDERAL RESERVE BANK OF ST. LOUIS

lation growth here was consistent with a relatively
high rate of employment growth.
Per capita personal income in Memphis increased
sharply in recent years along with jobs and popula
tion. Such income rose 3.7 per cent per year from
1959 to 1968 after a relatively low rate of gain in the
prior decade. In the recent period per capita personal
income growth in Memphis was exceeded only by
Evansville, Pine Bluff, and Texarkana of the regional
SMSAs, and was well above regional and national
SMS A averages (Table IV).
Despite the recent income gains, per capita income
in the area remains relatively low, averaging $2,446
in 1968, or 86 per cent of the regional SMSA average,
and 79 per cent of the national SMSA average.

Pine Bluff, Arkansas
Pine Bluff, the smallest SMSA in the region, had a
relatively high rate of employment growth from 1960
to 1968. The 3.9 per cent growth rate here was well
above CMV and national SMSA averages and was
exceeded in the CMV states only by Fort Smith,
Springfield, and Texarkana (Table II).
Geographically-oriented employment, which ac
counts for more than one-fourth the area total, grew
3.5 per cent per year, less than total employment
growth but slightly above the average Eg gain for the
region. The large E g sector in Pine Bluff and its high
growth rate reflect primarily a government-operated
ordnance plant which had sizeable employment gains
during the period. Excluding the ordnance plant, E g
here accounts for less than 15 per cent of total em
ployment, and growth was quite nominal, rising from
2.9 to 3.4 thousand, only 1.8 per cent per year.
The complementary sector, which accounts for
about 11 per cent of total employment, grew only at
the rate of 1 per cent and declined relative to total
employment during the period. Urban-oriented em
ployment, accounting for about three-fifths the area
total, rose at a 4.6 per cent rate, the highest E u
growth rate of any SMSA in the region and well
above the growth rate of other employment sectors
in Pine Bluff.
Per capita personal income in Pine Bluff rose 3.9
per cent per year, an above-average rate for both
CMV and national SMSAs (Table IV). This high rate
of per capita income gain, coupled with high em
ployment growth, indicates rising labor productivity
in the Pine Bluff area. Population in Pine Bluff grew
Page 18

JU LY , 1970

0.9 per cent per year in the period 1960-68, a rate
well below both the regional and national SMSA
averages.

Springfield, Missouri
Total employment in Springfield increased at a
rapid rate relative to SMSAs in both the CMV and
the nation from 1960 to 1968. The 4.3 per cent rate
of employment growth was exceeded only by Tex
arkana among the CMV metropolitan areas and was
more than 50 per cent greater than the average CMV
and national SMSA rates (Table II).
Geographically-oriented employment changed little
on balance during the decade. It declined slightly
from 1960 to 1965, increased sharply for the next two
years, was unchanged from 1967 to 1968, and de
clined sharply from 1968 to 1969. The closing of a
large machinery manufacturing plant in the area was
a major factor in the sharp 1968-69 decline. Relative
to the total, geographically-oriented employment de
clined from 7.6 to 6.5 per cent during the 1960-68
period (Table III).
In contrast to little Eg growth, complementary em
ployment rose throughout most of the decade with
especially rapid gains after 1964. Such employment
more than doubled, rising from 4.4 to 9.6 thousand,
and relative to total employment, increasing from
11.9 to 16.9 per cent. These gains are attributed to
sharp increases in a wide variety of manufacturers of
both durable and nondurable goods. New plants or
expansions resulted in larger employment in the man
ufacture of industrial ventilators, radios, plastics,
boxes, cement, and shoes.
Urban-oriented employment, which accounts for
more than three-fourths the total, grew 3.7 per cent
per year, an above-average rate of growth for all
regional SMSAs.
The Springfield population has in recent years
grown at a high rate consistent with the employment
gains. Population increased 1.8 per cent per year from
1960 to 1968, somewhat faster than either the CMV
or national SMSA average. This rate was equaled by
Fort Smith but was exceeded in the CMV states only
by Little Rock (Table I).
In contrast to the rapid employment and popula
tion gains, per capita personal income in the Spring
field area grew at a relatively low rate during the
years 1959 to 1968. Average real income rose only
2.5 per cent per year, compared with a 3.1 per cent
rate for the regional SMSA total. The rapid increase

JU LY , 1970

FEDERAL RESERVE BANK OF ST. LOUIS

in employment, coupled with only nominal gains in
per capita income in the area, reflects a relatively
elastic labor supply in the Springfield area.

Texarkana, Arkansas

—

Texas

Total employment in Texarkana grew at the rela
tively high rate of 4.6 per cent per year from 1960 to
1968, the highest rate of any SMSA in the CMV
states and well above the 2.6 per cent average rate
for major national labor markets. Most of the area’s
employment gains are attributed to a sharp increase
in the geographically-oriented sector.
Geographically-oriented employment, which con
sists largely of workers in ordnance manufacturing,
rose sharply with the expansion of Viet Nam military
operations in 1965. Such employment now constitutes
almost two-fifths of total employment in the area, up
from less than one-fourth the total in 1960. Eg here
is the largest per cent of total employment of all
SMSAs in the region.
Employment in complementary industries likewise
increased at a high rate, but this sector still consti
tutes less than 5 per cent of the area total. Urbanoriented employment was apparently little affected
by sharp increases in the E g and E c sectors. Such
employment grew only 1.4 per cent per year, well
below the average rate for E u in all metropolitan
areas in the CMV states. The number of employees
in transportation and utilities and the self-employed
remained about unchanged during the period, while
small increases occurred in construction, finance, serv
ices, and state and local government.
Population in Texarkana grew at a 1.7 per cent rate
from 1960 to 1968, somewhat faster than the SMSA
average in the region and slightly faster than the
national SMSA average. Population in the area de
clined somewhat during the prior decade, reflecting
migration from the rural portions of the two counties
which currendy comprise the SMSA.
Per capita personal income in Texarkana has grown
at the highest rate of all SMSAs in the region and
more than double the regional and national SMSA
averages. Most of this sharp increase is attributed to
the major increase in ordnance employment and the
relatively high wage rates prevailing in this industry.

Statistical Analysis of Area Growth Patterns
As indicated in the tables and charts, wide varia
tions occurred in employment growth patterns among
the metropolitan areas in the CMV. The sharp gains

of geographically-oriented employment (E g) in Mem
phis in 1965, for example, were not followed by rising
growth rates of complementary (E c) and urbanoriented (E u) employment. Eg grew faster in Little
Rock than other employment categories throughout
most of the period. In contrast, E u growth led other
sectors in St. Louis, and E c grew fastest in Spring
field. These diverse patterns cast doubt on the validity
of applying any single explanation of employment
growth uniformly among urban areas. This section
investigates these growth trends more rigorously using
statistical analysis.
If growth of Eg and E c generate additional em
ployment expansion within a labor market area, as
postulated by export base theorists, then from the
following equations one would expect the indicated
results, where each coeflicient is significantly different
from zero:
( 1)

AE : a +
b > 1

b AEg

( 2)

AE : a +
b > 1

b A(EC +

( 3)

a + b A(EC +
AEu
b > 0

( 4)

a + b AEg
AEC
b > 1)

Eg)
Eg

On the other hand, if Eg or E c growth “crowd
out,” or replace, expansion in another sector, con
trary to the postulates of the export base approach,
the following are the expected results:
( 1 ')

AE = a + b A Eg
b < 1

( 2 ')

AE = a +
b < 1

( 3 ')

A E U = a + b A (E c +
b < 0

(4 ')

AEc = a +
b < 0

b A (E C +

E g)
E g)

b A Eg

Table V should be interpreted in light of these
expectations. The equations in this article have incor
porated the approximate form of (1) - (4) above,
utilizing lagged values of the independent variables
in each case.
The time series regressions of employment growth
by sectors in individual cities further confirm the
relatively small impact of geographically-oriented
employment growth on employment in other sectors.
First differences of quarterly data indicate that geo
graphically-oriented employment had some initial im
pact on total employment in most CMV metropolitan
areas (Table V). In equation (1) the coefficient for
the current quarter was significant at the 5 per cent
Page 19

FED ER AL RESERVE BANK OF ST. LOUIS

JU LY , 19 70

Table V
R E G R E S S IO N
St. Louis

Evansville

Fort Smith

Little Rock
(1 )

t
t— 1
t— 2
SUM
R2

1.752
( 6 .63 8)
0.705
( 3.73 3)
— 0.694
( — 2.71 0)
1.763
( 3 .73 3)
.55

♦
*
*
*

1.040 *
( 4 .50 7)
0.498 *
( 2.45 5)
—0.292
( — 1.291)
1.246 *
( 2.45 5)
.35

0.941
( 5 .77 7)
0.372
( 2.685)
—0.383
( - 2 .3 5 1 )
0 .93 0
( 2.685)
.59

*
(
*
(
•
(
•
(

A N A L Y S IS
Louisville

Memphis

Pine Bluff

Springfield

Texarkana

AE := a + 2bA Eg

1.429 *
4 .5 3 8 )
0.965 *
3 .92 2)
0.019
0 .06 2)
2.413 *
3 .9 2 2 )
.38

0.962 *
4 .03 5)
0.434
( 1.652)
—0.311
( - 1 .0 1 8 )
1.085
( 1.652)
.40
(

1.268 *
4 .78 9)
0 .55 6 *
( 2.93 4)
- 0 .4 3 4
( — 1.648)
1.389 '
( 2.93 4)
.38
(

0.893 *
3.91 9)
0.38 4 *
( 2.10 4)
- 0 .3 1 6
( — 1.380)
0.961 *
( 2.10 4)
.28

(

(
(
(
(

0.27 7
0 .44 3)
0.236
0 .4 9 2 )
0.07 7
0 .11 4)
0.590
0 .4 9 2 )
.00

0.71 4
9 .67 9)
0.358
( 10.349)
- 0 .1 7 7
( - 2 .3 0 9 )
0.89 5
( 10.349)
.81

(

*
*
*

(2 ) A E = a + 2 b A (E g + Ec)
t

1.723
6 .94 3)
0.686
( 3 .90 4)
- 0 .6 9 4
( - 2 .8 8 9 )
1.715
( 3 .90 4)
.57

t-1
t— 2
SUM
R2

0.883
7 .95 5)
0.39 9
( 4.12 4)
- 0 .2 8 4
( - 2 .5 7 9 )
0.99 9
( 4 .1 2 4 )
.64

(

*
*
*

1.005
6 .46 4)
0.398
( 2.88 3)
- 0 .4 0 8
( — 2.601)
0.995
( 2.88 3)
.65

(

*
*
*

1.289 •
5 .40 1)
0.82 7 *
( 4.30 8)
- 0 .0 4 8
( - 0 .2 0 2 )
2.069 *
( 4 .30 8)
.45
(

*
*
*

(
(
(
(

0.813 *
7 .93 3)
0.564 *
6.35 8)
0.032
0 .2 8 1 )
1.409 *
6 .35 8)
.66

1.370 *
7.23 4)
0.804 *
( 5 .2 5 7 )
- 0 .1 6 5
( —0 .89 2)
2.009 *
( 5 .2 5 7 )
.59
(

0.724 *
3.28 8)
0.383 *
( 2.05 6)
- 0 .1 5 0
( - 0 .6 7 3 )
0 .9 5 7 *
( 2.05 6)
.20

0.93 0 *
3.69 0)
0.478 *
( 2.70 1)
- 0 .2 1 2
( - 0 .8 5 2 )
1.196 *
( 2.70 1)
.26

0.70 9
9 .5 4 5 )
0 .3 4 4
( 9 .63 9)
- 0 .1 9 4
( - 2 .5 0 0 )
0.859
( 9 .6 3 9 )
.80

- 0 .0 4 7
( - 0 .2 4 3 )
0.035
( 0 .2 1 4 )
0.100
( 0.5 0 8 )
0.079
( 0.2 1 4 )
.00

0.162
0 .6 8 8 )
0.10 7
( 0.6 4 5 )
—0.002
( —0 .0 0 8 )
0.26 7
( 0 .6 4 5 )
.00

- 0 .0 8 2
( - 1 .5 7 8 )
- 0 .0 3 9
( — 1.555)
0.024
( 0 .4 4 0 )
—0.09 7
( - 1 .5 5 5 )
.05

0.045
0.7 0 8 )
0.004
( 0.0 7 4 )
—0.039
( - 0 .6 1 5 )
0.009
( 0 .0 7 4 )
.00

0.001
0.0 0 4 )
- 0 .0 0 3
( - 0 .0 1 5 )
- 0 .0 0 6
( - 0 .0 2 0 )
- 0 .0 0 8
( 0 .0 1 5 )
.00

(

*
*
*

(3 ) A E u = a + 2 b A ( E g + Ec)
t
1— 1
t— 2
SUM
R2

0.925
( 4 .93 0)
0.295
( 2.222)
- 0 .4 8 3
( — 2.65 6)
0.738
( 2 .22 2)
.39

*
*
*
*

0.095
( 1.348)
0.021
( 0 .3 3 4 )
- 0 .0 6 4
( - 0 .9 1 8 )
0.052
( 0 .33 4)
.01

0.278 *
( 2.40 4)
0.098
( 0 .95 0)
- 0 .1 3 2
( — 1.129)
0.244
( 0 .95 0)
.16

(
(
(
(

0.53 6 *
2.35 0)
0.49 0 *
2.668)
0.198
0 .8 6 9 )
1.225 *
2.668)
.15
(4 )

0.019
0.7 2 7 )
0.010
( 0 .54 8)
— 0.004
( — 0.1 4 3 )
0.026
( 0 .54 8)
.00
(

t— 1
t—2
SUM
R2

(
(
(
(

0.109
0.5 7 9 )
0.11 7
0 .7 0 7 )
0.06 7
0 .3 6 1 )
0.292
0.70 7)
.00

—0.05 7
( — 1.349)
— 0.041
( — 1.144)
— 0.005
( - 0 .1 1 1 )
— 0.102
( 1.144)
.00

- 0 .0 5 9
( - 0 .8 7 6 )
0.029
( 0.3 9 5 )
0.102
( 1.140)
0.072
( 0 .39 5)
.00

(
(
(
(

0.63 6 *
3.7 8 3 )
0.491 *
3.6 1 8 )
0.100
0 .6 1 3 )
1.226 *
3.61 8)
.30

(

A E c = a "H 2b A Eg

0.166 *
2.89 1)
0.063
( 1.399)
- 0 .0 7 2
( — 1.253)
0.157
( 1.399)
.16
(

0.120
0 .6 0 7 )
0.003
( 0 .0 1 5 )
— 0.115
( —0 .4 5 3 )
0.008
( 0 .0 1 5 )
.00
(

- 0 .1 1 9
( — 1.150)
—0.084
( - 1 .1 3 3 )
- 0 .0 0 7
( - 0 .0 6 7 )
- 0 .2 1 0
( - 1 .1 3 3 )
.00

(

(
(
(
(

0.001
0 .0 5 6 )
0.01 0
1.02 6)
0.014
0 .6 4 1 )
0.025
1.026)
.00

Note: The eauations shown here use the Aimon technique with three lags, endpoints constrained to zero, and a third degree polynomial.
For further discussion of the methodology, see Shirley Alraon, “The Distributed Lag Between Capital Appropriations and Expenditures,” Econometrica. (Janu ary 1965), pp 178-196. Regression coefficients are the top figures, and their “t ” values are enclosed by
parentheses below each coefficient. The regression coefficients marked by an ( * ) are statistically significant a t the 5 per cent level.

level for eight of the nine SMSAs, and the sums of
the coefficients for three quarters were significant in
seven of the nine SMSAs.

Three of the seven SMSAs with significant coeffi
cients indicated some crowding out; that is, an in
crease in Eg led to less employment in other sectors.

The impact multiplier was positive for each city
and averaged slightly greater than unity in the cur
rent period. The lagged multipliers, however, changed
signs after the second quarter for most cities and
tended to reduce the total multiplier. The sums of
the multipliers for those SMSAs with significant coef
ficients ranged from a high of 2.4 in Little Rock to
0.9 in Texarkana and Fort Smith, and averaged 1.4.

The combined relationship of E g and E c to total
employment, as indicated in equation (2), is signifi
cant for every SMSA in the region. The results vary
greatly, however, with total multipliers exceeding 2
in both Little Rock and Memphis. Substantial crowd
ing out is indicated in Texarkana, and coefficients
were slightly less than unity in three other SMSAs.

Page 2 0

JU LY , 1970

FEDERAL RESERVE BANK OF ST. LOUIS

Equation (3) results are inconclusive with regard
to the induced expansion of urban-oriented employ
ment. The summed coefficients are positive for the
most part, but they show significance only for St.
Louis, Little Rock, and Memphis. Crowding out is
indicated in Texarkana although the coefficient is not
significant.
Equation (4) investigates the hypothesis that geo
graphically-oriented industries attract complementary
activities. No significant correlations were found be
tween Eg and E 0. Almost as many coefficients were
negative as were positive in the lagged quarterly
data, and sums of the coefficients were negative in
three of the SMSAs. In addition to the lag structure
included in Table V, lags up to three years were
tested on this equation as well as the other equations,
with essentially unchanged results.
Spearman rank correlation analysis likewise reveals
little relationship between the growth rates of the
various employment sectors (Table V I). Although
causation cannot be determined from this method,
failure of correlation results to support a theory in
dicates that the theory is incomplete at best. Such
basic tenets of the export base theory as the impact
of Eg on E c, Eg on total employment, and E g on
population are not supported by the Spearman rank
correlation coefficients, indicating little relationship
between these factors.
This analysis does indicate, however, some impor
tant growth relationships. Geographiclly-oriented em
Table VI
R A N K C O R R E L A T IO N C O E F F IC IE N T S G R O W T H
F A C T O R S IN N IN E C M V M E T R O P O L IT A N A R E A S *
Factors
Geographically-oriented and
complementary employment
Geographically-oriented and
urban-oriented employment
Geographically-oriented and
total employment
Complementary and urban-oriented
employment
Geographically-oriented employment
and population
Total employment and population
Geographically-oriented employment
and per capita personal income
Total employment and per capita
personal income
Population and per capita
personal income

Spearman
Coefficients
.083
—.450
.2 17
— .200
.071
.4 87
.717
.033
—.463

*A Spearman rank correlation coefficient of .600 is significant at
the .05 level with nine SM SAs. For a description of this method
of analysis, see Sidney Siegel, Nonparametric Statistics (McGraw
H ill: New York, 1956), pp. 202-205 and 284.

ployment was significantly associated with per capita
personal income growth. Furthermore, correlations of
three other relations —Eg and E u, total employment
and population, and population and per capita per
sonal income —approach significance, the first and
last with negative coefficients and employment and
population with a positive one.

Evaluation of Statistical Relationships
There are a number of possible reasons why export
base analysis has not proven more useful for explain
ing growth in the CMV areas. First, the theory tends
to focus primarily on demand for output of exporting
industries. Demand for a city’s output, however, is
derived from two sources, the local economy and the
rest of the world. A city’s growth in employment, ac
cording to the export base thesis, relies primarily on
growth of national and international demand for ex
port goods. Growth of the export sector may be offset,
however, by a decline in resource availability for the
urban and complementary sectors. These sectors are
influenced by resource demands of the export indus
tries. For example, wholesaling and warehousing fa
cilities which are included in the urban-oriented
sector may be moved to lower cost locations as a
result of Eg demands for labor in an SMSA. Such
effects imply that industry classification by sector
may not only be unstable over the longer pull, but
may also be unstable over relatively short spans as
the relative efficiency of production changes in an
SMSA.
Second, the export base view tends to ignore supply
factors, including the fact that economies and dis
economies of production and input availability have
an observable impact on employment and output. If
the supply of labor is relatively inelastic with respect
to wage rates, a gain in Eg may tend to crowd out
employment elsewhere. On the other hand, if the
supply of labor is relatively elastic with respect to
wages, a gain in E g may induce employment gains
in other sectors as has occurred in Little Rock and
Memphis. Ultimately, the community which can pro
duce more efficiently will likely grow faster.
Third, there is the question of the use of employ
ment statistics as a measure of the economic base. To
the extent that the labor-output ratio changes at dif
ferent rates in different industries over time, the
linear specification of the equations tested may be
inappropriate. Furthermore, it is difficult to deter
mine with precision the proportion of employment
engaged in producing goods and services for export.
The method used here may lead to some bias in the
results.
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FEDERAL. RESERVE BANK OF ST. LOUIS

Fourth, demand for output by sector may grow at
unequal rates. The nonbasic service sector, for in
stance, is experiencing great secular expansion na
tionally.10 As income increases over time, the popula
tion tends to demand more services relative to goods.
Finally, growth in both per capita income and
geographically-oriented employment in a given SMSA
(excluding military related jobs) may be more re
lated to basic factors, such as capital accumulation
and the acquisition of managerial and labor skills,
than to increases in national demand for a few prod
ucts which happen to be currently produced in a
given SMSA.

Crowding Out Effects
The crowding out effects of gains in Eg on employ
ment in other sectors are not only indicated in statis
tical analysis of the data, but also on an a priori basis.
Export type industries generally pay higher wages
than local service type industries. In January 1969,
production workers in durable goods manufacturing
and ordnance and accessories had average weekly
earnings of $136.70 and $139.59 respectively in the
United States. In comparison, average earnings of all
nonagricultural production workers were $110.63 per
week.11
A rise in money wages which results from an in
crease in export demand has effects which both in
crease and reduce demand for labor in the domestic
sector.12 The increase in money wages, leads to an
increase in income per family, higher demand for
domestic output, and an increase in derived demand
for domestic employment. The rise in money wages
relative to the price of domestic output, however,
provides incentive for the substitution of other fac
tors for labor in domestic production. Furthermore,
a rise in price of domestic output tends to reduce the
quantity of such output demanded and thereby the
quantity of labor demanded.
10According to a recent study, “the Service sector’s share of
total employment has grown from approximately 4 0 per cent
in 1929 to over 55 per cent in 1967. Between 1947 and 1965
alone, there was an increase of 13 million jobs in the Service
sector compared with an increase of only 4 million in
Industry [primarily manufacturing] and a decrease of 3
million in Agriculture.” Victor R. Fuchs, The Service Econ
omy, (New York: National Bureau of Economic Research,
1 9 6 9 ), p. 2.
n U.S. Department of Labor, Monthly Labor Review, (M arch
1 9 6 9 ), pp. 104 and 105.
12Richard F . Muth, “Differential Growth Among Large U.S.
Cities,” (Working Paper CW R 15, Institute for Urban and
Regional Studies, Washington University, February 1968),
pp. 13, 14.
Page 22

JULY, 1 9 7 0

The apparent relationship between E g growth and
per capita income gains found in the Spearman cor
relation analysis may reflect both the lack of a com
pletely elastic labor supply and some rigidities in the
labor market. In the absence of infinite elasticity in
the labor supply, any increase in demand for labor as
a result of new employment in export industries tends
to raise money wages throughout the labor market.
Higher per capita income will result. Even with a
relatively elastic labor supply, if the new geographi
cally-oriented employees are paid higher than aver
age wage rates in the community as a result of col
lective bargaining agreements or other nonmarket
factors, average per capita money income in the area
will rise.
Some relationship between employment and pop
ulation growth can be anticipated except in unusual
situations. The labor force tends to rise with an in
crease in population in the absence of unusual dis
tribution of the various age groups.

Growth Related to Education and Skills
The differences in nominal incomes among SMSAs
can be traced to a multiplicity of factors. Sizeable
differences in living costs occur between various sec
tions of the nation and among the various cities,ac
cording to the United States Department of Agricul
ture.13 Food costs in metropolitan areas are generally
higher than in the small cities, while total costs in the
Northeast are generally greater than in the rest of
the nation. Although the study did not provide di
rect comparisons between two CMV metropolitan
areas, the fact that living costs in St. Louis were 1
per cent above the national average, while Nashville,
Tennessee and Baton Rouge, Louisiana were 5 and 6
per cent respectively below the national average, in
dicates that differences in living costs account for part
of the difference in nominal per capita incomes
among the CMV metropolitan areas. Part of the
nominal income difference, however, surely reflects
a difference in well-being.
Variations in real per capita income levels among
SMSAs are probably more related to unequal labor
and managerial skills than to autonomous growth in
a specific industrial sector. Theodore W. Schultz es
timated on a tentative basis that the stock of educa
tional capital in the labor force rose about one and
one-half times the stock of tangible capital between
1929 and 1957, implying that the growth of invest13U.S. Department of Agriculture, T he Farm Index (January
1 9 6 9 ), pp. 19, 20.

JULY, 1 9 7 0

FEDERAL RESERVE BANK OF ST. LOUIS

ment in man is a major source of economic growth.14
In a series of regression analyses, Jacob Mincer found
that the rate of return to various types of on-the-job
training and to a college education were about
equal.15

By 1970 the urban population of Missouri accounted
for 63 per cent of the state total, a slightly greater
per cent than in the nation. Furthermore, urbaniza
tion in Mississippi and Arkansas had moved sharply
upward, rising to 39 and 44 per cent respectively.

Edward Denison has specified the importance of
labor force education:

Although the CMV metropolitan population grew
at less than the national rate on a weighted average
basis in the 1960-68 period, most areas in the region
grew faster than the national average (Table I).
Those areas with the lowest growth rates are located
in the northern portion of the region, and those with
the highest growth rates in the southern portion of
the region, reflecting the tardy farm to nonfarm ad
justments in the South.

A b etter ed u cated w ork force — from top m anagem ent
dow n — will be b e tte r able to learn ab ou t and to
utilize th e m ost efficient production p ractices known.
. . . Additional education, especially general ed u ca
tion, presum ably increases versatility, m obility and
aw areness of em ploym ent opportunities.16

SMSA Employment and Population
Affected by Farm Sector
Part of the difference in employment growth among
SMSAs in the CMV may be associated with unequal
rates of migration from farm to nonfarm occupations.
Rapid growth in farm output per person relative to
demand for farm products since the end of World
War II has resulted in a major reduction in farm
workers and a mass migration from rural to urban
type occupations throughout the nation. Although such
migration is still sizeable, it has been on the wane in
recent years as indicated by the slower rate of ur
banization (Table V II).
This moderation in the rate of urbanization is ob
servable in the Central Mississippi Valley. The sharp
uptrend in urbanization here occurred somewhat
later than in the nation as a whole because of the
slower rate of agricultural and industrial develop
ment.17 Missouri, with 51 per cent of the population
living in urban areas, was the most
urbanized state in the region in 1930.
Table VII
At the other end of the scale, Missis
PER
sippi and Arkansas had only 17 and
CMV STATES
21 per cent of their respective popu
lations living in urban areas.
Arkansas
1^Theodore W . Schultz, “Reflections on In
vestment in Man,” Journal of Political
Economy, (Supplement: October 1 9 6 2 ),
pp. 1-8.
15Jacob Mincer, “On the Job Training: Costs,
Returns, and Some Implications,” Journal
of Political Economy, (Supplement: Octo
ber 1 9 6 2 ), pp. 50-79.
16Edward F . Denison, W hy Growth Rates
D iffer (Washington: The Brookings Insti
tution, 19 6 7 ), pp. 79-80.
17The declining rate of urbanization was
documented earlier by Clifton B. Luttrell
and Claire Armentrout, “Growth — Metro
politan vs. Nonmetropolitan Areas in the
Central Mississippi Valley,” this Review
(January 1969).

Kentucky
Mississippi
Missouri
Tennessee

Employment Reflects Both Labor Supply
and Demand
Rapid employment and per capita income growth
in most CMV metropolitan areas probably reflects, in
addition to rising demand for some local export prod
ucts, both a more rapid growth in labor supply and
an improvement in the quality of the labor force
compared with the national average. Employment
growth in the region exceeded the average growth
rate for large labor market areas in the nation during
the 1960-68 period. Eight of the nine SMSAs in the
region exceeded the national SMSA average growth
rate of 2.6 per cent (Table II). Employment growth
in the region was fed by a supply of migrants from
rural to urban areas. Since per capita income growth
was above the national average despite the increase
in number of workers, labor productivity was appar
ently rising at a relatively high rate.

CEN T URBAN

P O P U L A T IO N ,

1 8 7 0 -1 9 7 0 *

1870

1900

1930

1940

1950

1960

1970**

2.6%
14.8
4.0
25.0
7.5

8.5%
21.8
7.7
36.3
16.2

20.6%
30.6
16.9
51.2
34.5

2 2.2%
29.8
19.8
51.8
35.2

32.3%
33.5
27.6
57.9
38.4

41.9%
38.7
37.5
61.2
44.0

43.8%
39.3
39.4
63.4
46.8

OTHER EIGHTH DISTRICT STATES
Illinois
Indiana

23.5
14.7

54.3
34.3

73.9
55.5

73.6
55.1

74.5
56.4

76.1
57.2

77.9
58 .9

United States

25.7

39.7

56.2

56.5

59.0

59.3

6 1 .7

♦Urban population as used here includes all persons living in incorporated areas of
2,500 or more inhabitants.
♦♦Projected by Federal Reserve Bank of St. Louis.
Sources: Hope T. Eldridge and Dorothy Swaine Thomas, Demographic Analyses and
Interrelation, Vol. I l l of Population Redistribution and Economic Growth:
United States, 1870-1950 (Philadelphia: American Philosophical Society, 1964),
and Department of Commerce, Bureau of the Census, 1960 Census of Population.

Page 23

JU L Y , 19 70

FED ER AL RESERVE BANK OF ST. LOUIS

Improved educational programs and labor skills
were probably important factors in this high rate of
growth in productivity and well-being. Some relative
improvement may have occurred in the quality of
schools for most people in the area. Military training
for the area’s youth during and since World War II
has likely contributed to regional labor skills. In ad
dition, there has been a wide dissemination of labor
skills in the smaller cities and rural areas through
more extensive on-the-job contacts with highly skilled
people in recent years.

Summary
Employment growth in Central Mississippi Valley
metropolitan areas exceeded the national SMSA aver
age for major labor markets during the 1960-68 pe
riod. Population grew at a slightly lower rate and
per capita personal income at a slightly higher rate
than the national SMSA average.
Wide variations occurred in growth rates among the
various SMSAs in the region. Employment growth
rates ranged from 2.3 to 4.6 per cent, population from
0.2 to 2.2 per cent, and per capita personal income
from 2 to 6.4 per cent.
Regression analysis indicates that growth in the
export base sector does not always create multiple
employment expansion throughout the local econ
omy. With the exception of perhaps three SMSAs in
the CMV, additional workers in local export occupa
tions had only a slight impact on employment in the

urban-oriented sector of the local economy. In some
instances such service type employment is actually
crowded out. Rank correlation analysis of all the
SMSAs indicates no significant relationship between
export base employment and total employment
growth or between export base employment and pop
ulation growth.
Nevertheless, export base employment growth was
apparendy an important factor in raising the level of
per capita money income in some SMSAs. Rank cor
relations indicate a significant relationship here, and
with nominal per capita gains, some real income gains
were probably realized.
This study provides evidence that such supply fac
tors as quantity and quality of labor and managerial
skills and availability of capital may have been as
important as demand for export base products in
determining growth in the CMV metropolitan areas.
The SMSAs located near large reservoirs of lower
income farm labor had the more rapid growth rates
in employment, population, and per capita personal
income. A high rate of growth in farm technology
contributed to urbanization in these areas, and more
uniform educational programs nationally have un
doubtedly narrowed the labor and managerial skill
gap between CMV and national SMSAs. As this gap
continues to narrow, the differential in productivity
will also diminish. The long-run impact of these trends
is a gradual reduction of the regional disparities in
personal income and well-being.

This article is available as Reprint No. 58.

Full text of Review (Federal Reserve Bank of St. Louis) : July 1970

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