Neighborhood Characteristics Matter When Businesses Look for a Location

1. Neighborhood Characteristics MatterWhen Businesses Look for a Location Christopher H. Wheeler* Federal Reserve Bank of St. Louis July 19, 2006 *The views expressed herein do not necessarily represent those of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

2. Basic Business Growth Patterns • Growth across ‘local markets’ in U.S. • Uneven in recent decades • Metro areas in... • South & West have grown rapidly • Midwest & Northeast have grown less rapidly

3. Basic Business Growth Patterns • Private business growth (1994-02) • More than 20%: • Atlanta, Charlotte, Denver, Phoenix, Salt Lake City, San Diego • Less than 10%: • Detroit, Pittsburgh, Philadelphia, St. Louis

4. Basic Business Growth Patterns • Growth within ‘local markets’ has also been uneven • Some areas (‘neighborhoods’) have... • Grown little or lost business activity • Grown rapidly

5. Basic Business Growth Patterns • Change in # of businesses within ZIP codes, 1994-02:

6. Q: As long as a metropolitan area as a whole is growing, why should we care if certain areas within that metro area are not?

7. Q: As long as a metropolitan area as a whole is growing, why should we care if certain areas within that metro area are not? A:‘Neighborhoods’ are influenced by their own growthindependently of what is happening at the aggregate metro area level

8. Importance of Business Growth within Neighborhoods • Affects viability of local government activity • Publicly provided services (e.g. roads, police protection, schools) require revenue • Business activity   • Local government’s ability to provide services may 

9. Importance of Business Growth within Neighborhoods •  Business activity within ZIP code 

10. Evidence

11. Evidence • 100-establishment  in a ZIP code associated with... 3 to 4%  in rate of per capita or per household income growth

12. Evidence • 100-establishment  in a ZIP code associated with... 2%  in fraction of residents with bachelor’s degree or more

13. Evidence • 100-establishment  in a ZIP code associated with... 0.2%  in the rate of unemployment

14. Evidence • 100-establishment  in a ZIP code associated with... • Decrease of 3 crimes per 10,000 residents • Statistically significant decreases in burglaries, assaults, larcenies, & auto thefts per 10,000 residents

15. Downtowns • Study not limited to downtowns • Potential benefit to growing downtown (traditional central city of a metro area): • Surrounding metropolitan area benefits • Greater employment & income growth potential

16. Determinants of Business Growth in Neighborhoods • Neighborhoods ZIP codes • Data accurately measured at ZIP level • ZIP codes represent a diverse array of distinct areas within metro areas Note: ZIP code characteristics considered are not intended to be comprehensive

17. Data

18. Analysis

19. Population Characteristics • Businesses may seek • Large resident populations—customers and workers would be close • Characteristics such as • Age • Education • Income • Unemployment status ...may also affect desirability of a ZIP code

20. Population Characteristics — Results

21. Interpretation • Population: • Positives and negatives of larger population in a ZIP code roughly counterbalance • Density: • Greater congestion, land rents, restrictions on commercial activity limit business growth

22. Interpretation • Per capita income: • Businesses may seek neighborhoods with purchasing power • Income may be correlated with other desirable characteristics • % Bachelor’s degree: • College-educated workers are particularly desirable; tend to possess higher incomes; may bring other desirable qualities to a neighborhood

23. Interpretation • % 25-44 years of age: • Relatively young populations may be desirable consumers or workers • Unemployment rate: • Joblessness may signal lack of desirable labor, purchasing power, or other features • “Poverty trap” nature of unemployment: • High unemployment → Slow business growth → High unemployment …

24. Crime • Criminal activity • Increases the costs (broadly defined) of doing business • Should be negatively associated with business growth • May gravitate toward high growth neighborhoods

25. Crime — Results

26. Interpretation • Crime matters for growth @ ZIP code level • Higher crime strongly deters growth of business establishments • Associations particularly large for robberies, auto thefts, and assaults • “Vicious cycle” pattern to crime: high crime  slow growth  high crime …

27. Government Expenditure& Taxation • Local government activity influences economic environment of a municipality • Taxation increases costs • Revenues Provide public goods & services (e.g. roads, schools, utilities, policing) Can add to productivity

28. Government Expenditure& Taxation — Results

29. Government Expenditure& Taxation — Results

30. Government Expenditure& Taxation — Results

31. Interpretation • Many public goods & services clearly important: • Roads, police & fire protection, primary & secondary education, some utilities • Some reflect state of physical infrastructure • Common finding in literature on development of low income neighborhoods • Potential for “poverty traps”: business activity tax base  deteriorating infrastructure   business activity …

32. Interpretation • Primary & secondary education result may reflect positive association between education spending & spending on roads, policing, etc. • High education expenditures may also be typical for municipalities with high levels of education & income • Note: positive associations hold even after accounting for a ZIP code’s education & income

33. Interpretation • Negative association with spending on housing & community development likely reflects concentration of these expenditures in distressed areas (low education, high unemployment, high crime) • After accounting for income, education, unemployment, the negative association disappears

34. Interpretation • Positive association between business growth & tax revenue probably stems from positive link between revenue and many of the expenditure categories • Businesses are not deterred by high local taxes per se

35. Existing Business Activity • Businesses may wish to cluster their activities (e.g., shopping malls, office parks) • Simplifies transportation, adds amenities • Allows employers to learn from and keep an eye on competitors

36. Existing Business Activity — Results

37. Interpretation • Large amount of economic activity currently in place tends to be associated with slower growth • Consistent with the general pattern of decentralization in U.S. metro areas

38. Analysis by Industry • Repeat analysis looking at changes in # of business establishments within each of • Add additional feature: businesses and employment within the same industry (clustering or localization) • Different types of businesses likely seek different types of environments • Example: Locations desired by an auto plant, law firm, restaurant, & book store likely not the same 16 broad sectors

39. 16 Industry Categories

40. Results

41. Results

42. Results

43. Results

44. Broad Categorization of Neighborhoods • Downtown: Large numbers of workers and businesses • High density • Possibly high unemployment and crime • Mixed income and education • Primary Suburb: Large numbers of residents • Relatively large numbers of businesses and workers • High income and education • Low crime and unemployment • Fringe Suburb: Small populations • Few workers and businesses • Low densities • Low crime and unemployment

45. Summary of Industry Patterns

46. Summary of Industry Patterns

47. Summary of Industry Patterns • Two industries difficult to describe: • Management • Educational Services • Do not show strong associations with any of the three categories

48. Growth Patterns in the 8th District • Four metropolitan areas examined: St. Louis Louisville Little Rock Memphis

49. Business Establishment Growth,1998-02 St. Louis Avg.: 3.6 Range:-131to293 Louisville Avg.: 5.8 Range:-125to146 Little Rock Avg.: 10.25 Range:-120to 136 Memphis Avg.: 0.34 Range:-181 to237

50. Little Rock Business establishment growth 1998-02 • Average: 10.25 establishments • Range: -120 to 136