Midwest prospects and the new economy

OF CHICAGO

Chicago Fed Letter

Midwest prospects and
the new economy

Much of the credit for the U.S’s record-
breaking economic expansion and
productivity surge has been attributed
to technological advances, particularly
within information technology (IT)
industries or in the application of
these technologies to other industry
sectors. While the so-called new econ-
omy is benefiting all U.S. regions, the
level and character of IT/high-tech
(IT/HT) development varies widely
from one region to another. This
Chicago Fed Letter examines regional
measures of IT/HT presence and their
implications for regional growth.

Measuring IT/HT regions

A look at the history of U.S. regional
growth shows that IT/HT presence
has been a poor indicator of the future
growth and success of regional econ-
omies. During the high-tech boom
of the 1980s, most regions sought to
emulate the computer hardware
boom in California’s San Jose area
and the Route 128 area of Boston, as
well as the aerospace activity of South-
ern California. However, tech-intensive
regions such as the Boston area and
defense-laden Los Angeles foundered
badly in the late 1980s and early 1990s.
At the same time, a few new areas
such as Austin, Texas, and Sioux City,
Iowa-Nebraska, proved successful in
emulating computer hardware success.
Other regions proved highly success-
ful in unexpected ways. For example,
a partially unforeseen boom in com-
puter software boosted the Seattle
and Denver regions. And the lower-
tech Midwest astounded everyone
with its competitive revival in old-line
manufacturing. Later in the 1990s,
Los Angeles successfully filled a de-
mand for entertainment content in
video, cable television,
and on the Web, even
as its aerospace indus-
try continued to lan-
guish. All of these
success stories involved
technology, especially
information technolo-
gy. But the high-tech
measures of yesteryear
offered little if any
insight into future
regional success and
failure. To improve the
predictive power of
IT/HT measures, we
need to examine whether the exist-
ing measures adequately capture
technology’s far-reaching impact
across many sectors of the economy.

What have been the most common
indicators of regional high technol-
ogy? A commonly used definition is
the production of those high-tech
goods and services, such as computers
and telecommunication services, that
practically everyone would consider
to be high tech. For example, the
widely reported American Electronics
Association (AEA) study classifies in-
dustries—both service industries and
manufacturing—as being high tech
and tabulates the concentration of
employment within U.S. regions.
According to their definition, the
Mountain region had the highest in-
tensity of its work force in high-tech
industry categories, accounting for
approximately 6% of its total nonfarm
employment in 1998, followed by the
New England and Pacific regions.¹
The Midwest ranks eighth out of the
nine Census districts in the concen-
tration of total jobs classified as high
tech, although it ranks fourth in abso-
lute number of jobs (see figure 1).
The region accounts for over 16% of
the nation’s total payrolls, yet just over
12% of jobs in high-tech industries as

defined by AEA. While the Midwest
remains the most manufacturing-in-
tensive region in the U.S., it has a
(relatively) higher concentration of
its services in high-tech categories than
of its manufacturing.

Among Midwest states, Illinois had
the highest number of high-tech jobs,
218,000, ranking fourth in the AEA
study behind California, Texas, and
New York, and slightly ahead of Massa-
chusetts. Illinois has become one of
the lesser states in overall manufactur-
ing concentration—both high tech
and otherwise—but it achieves a
strong high-tech concentration due
to the Chicago area’s high concen-
tration in communications services
industries.

The Chicago area is not alone in its
high-tech concentration. A recent
study estimated that U.S. metropolitan
areas accounted for 94% of the na-
tion’s IT/HT output in 1999, exceed-
ing their 80% share of overall income
and total employment. Technology
and ideas flow most readily among
companies, entrepreneurs, and work-
ers who reside and work in proximity.
Apparently, older cities, as well as new
ones, may thrive in the new economic
landscape—as New York City’s success-
ful “silicon alley” collection of software

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