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Kaplan: Economic base theory: How the economy churns

Kevin Kaplan
Kevin Kaplan

As we continue to experience decent economic growth across the country, it is important to understand the mechanics of a strong local economic area.

We as brokers are on the ground floor of a churning economy, as we are a crucial part of the growth and movement of businesses and real estate assets.

We work closely with local municipalities to help attract and keep good companies and, thus, jobs, in the area.

Every municipality is after more tax dollars so they can retain or grow the quality of life for their residents. Many of them do this by wishing to have more retail tax dollars coming in the door.

Although more tax dollars is typically a good thing, most do not fully understand the market forces that drive that growth.

The economic base theory is one that is extremely applicable to this concept, and it would benefit any public representative or resident to understand this concept.

Economic base 

Jobs are broken down into two categories: nonbasic and basic employment. Basic employment consists of those activities or jobs that produce more goods and services than the LEA consumes. These are jobs that essentially bring in money from outside the LEA, which stays local and creates the need for other types of jobs.

Nonbasic employment jobs are a result of basic employment jobs. Those basic jobs bring in outside money to the LEA, and that money is used by residents to buy other goods and services in the local economy, thus demanding new nonbasic jobs. We won’t call it “trickle down” but rather “cause and effect,” with basic jobs as the cause for other nonbasic jobs.

A good local example is Stryker in Cary (formerly Sage Products). Stryker is a medical technology firm based out of Michigan. It has a large facility in Cary that employs hundreds of local residents. By selling goods and services outside the LEA (Cary), money comes into the LEA, and those residents will need other goods and services to spend that money on.

They will need places to eat, attorneys and accountants to help them, auto mechanics to fix their cars, teachers to educate their kids, and the list goes on.

These nonbasic  jobs get created, and some of that money will stay in Cary and attract other basic jobs. This important process starts with basic jobs (it’s more than just a theory).

Another local example is the Interstate 90 interchange in Marengo. Local officials are priming that interchange area to be a local economic hub of industrial and manufacturing activity.

Those decision-makers clearly understand the economic base model because they are zoning the areas for industrial and manufacturing knowing that there will be quality basic jobs produced.

They are not subscribing to the “zone it retail and sales tax dollars will come” false philosophy that plagues some. They know by setting the table for good basic jobs to enter that area, outside dollars will come in and, thus, the other sectors of that economy will flourish.

These basic jobs will bring in more residents to Marengo, and those residents will spend the money they make on local goods and services, which will require new jobs to meet that demand. This is the golden formula for economic growth.

We can use a calculation called the economic base analysis to find out which local sectors or companies are producing basic jobs. We then put the local economic base multiplier on certain jobs to quantify how many additional jobs it will produce.

There is some level of predictability, then, with how a new or existing local company and the jobs it creates will affect the LEA. Brokers and economists do this type of thing for a living. 

When municipalities and their elected officials covet retail sales tax revenue like it is the holy grail, a potentially big mistake is made when pursued to exclusion of manufacturing businesses that produce basic jobs.

Some municipalities will provide incentives for companies that supply basic jobs to come to town and set up shop. This type of activity has a huge effect on the LEA because it will bring in outside money and ease the burden on such a highly taxed area.

Ask yourself, “Are my local officials working to attract basic jobs?” 

If not, they may have the cart before the horse.

• Kevin Kaplan is a broker associate with Premier Commercial Realty. He can be reached at kevink@premiercommercialrealty.com.

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