Regional Update (July-September 1997)

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Economic Shifts Cause Florida's Major Cities to Interact Differently

Economic Shifts Cause Florida's Major Cities to Interact Differently

I n the 1970s the economies of many of Florida's major metropolitan areas performed similarly. However, Florida, like the rest of the nation, has undergone an array of economic changes in the last 25 years that has caused the similarities among its cities to slowly disappear. While the changes can be documented using economic analyses, a central question is how Florida's major metropolitan areas might now interact differently with each other if an economic shock, such as one generated by a policy change or an oil price increase, occurred.

Florida's Labor Markets

A n obvious example of the economic evolution in Florida's major metropolitan areas is the decline of the state's manufacturing base, down from 12 percent of the state's total employment in 1969 to 7 percent in 1995. Contributing to the decrease in manufacturing's share of overall employment is the growth of international trade and tourism. As a result of these and other forces, the economies of Florida's major cities have become less similar over time.

As might be expected, these gradual economic changes have caused the state's major metropolitan economies to interact in new ways. For instance, labor markets within the state that were once very similar in structure and behavior have become more dissimilar.

To track the development of Florida's economy within the last quarter-century, Atlanta Fed regional analyst Edgar Parker studied the labor markets within the state's major metropolitan statistical areas (MSAs). The cities, or MSAs, Parker studied were Miami, Orlando, Tampa, Fort Lauderdale, West Palm Beach and Jacksonville. The results of the study were published in the Atlanta Fed's Third Quarter 1997 Economic Review.

Parker used two econometric techniques to study the relationship among these MSAs. First, the author used cointegration analysis to examine the degree and type of long-run relationships that exist in these cities' labor markets. Parker then used another technique, common cycles analysis, which revealed the short-run responses to shocks in the MSAs' labor markets.

The author found that the long-run relationships shared by the MSAs' labor markets have changed as their economic structure has evolved. From 1970 to 1978, the MSAs displayed very similar growth patterns in their labor markets. From 1988 to 1996, however, as the MSAs' economies became more dissimilar, their labor markets became more independent too. Two of Florida's major metropolitan areas, Miami and Orlando, illustrate this point.

Miami and Orlando Diverge

I n particular, the study showed that the labor markets in Miami and Orlando were quite independent from those in the rest of the MSAs studied. This growth in relative independence is due to more specialization — Miami's in international trade and Orlando's in tourism — and increased linkages of the two MSAs to regions outside of Florida as their economies have developed. Because of this specialization, workers in these two cities need different skills than workers in other areas of the state.

Miami has grown to be the seventh-busiest container port in the United States. Orlando, on the other hand, has specialized in tourism, and with that specialization has come large growth in its service sector employment. Nationally, Orlando is ranked second behind Las Vegas in the relative percentage of service sector employment in its economy.

Parker uses common cycles analysis to further evaluate the short-run behavior responses to economic shocks in the labor markets of Florida's MSAs. The cyclical patterns displayed by these cities' labor markets suggest that their economies do indeed behave differently from each other in response to cyclical changes in the Florida's economy.

For example, over the entire 1970-96 sample period the pattern of short-run fluctuations in the labor markets is very different (see Chart 1). In fact, the trends in these two MSAs appear to counter one another. For instance, when Miami hit the height of its growth cycle in 1980, Orlando was near its lowest point in the cycle.

Chart 1
Estimated Cycles of Total Nonagricultural
Payroll Employment, 1970-96

Chart 1

Chart 2
Refiner's Acquisition Cost

Chart 1

What Might Cause These Differing Dynamics?

P art of the difference can be attributed to the effects of energy price shocks. Orlando is extremely dependent on tourism. Tourists coming into the area must be transported essentially by auto or air. Therefore, Orlando can be termed an oil-dependent region.

The sharp rise and decline in oil prices corresponds very closely to changes in Orlando's economy. For instance, when oil prices jumped from approximately $13.11 in January 1979 to a high of $37.48 per barrel as measured by refiner's acquisition cost in March 1981 (see Chart 2), Orlando experienced a significant downturn in its total payroll employment growth — a decline about 10 percent below its long-run trend. When oil prices then fell from $25.63 in January 1986 to $11.93 per barrel in August 1986, Orlando experienced an upturn in its total payroll employment growth.

Miami's economy is also dependent on energy, but its economy is more diversified, with international trade playing a large role. Miami's labor force is also much more diversified and less dependent on one particular industry. Thus, an oil shock is likely to have a smaller effect on Miami than on Orlando.

The competition between Miami and Orlando for workers may also help explain the differing behavior of their labor markets. Thus, increased economic activity in one MSA could negatively affect the other MSA by diminishing its access to labor.

For instance, the nationwide economic expansion of the 1980s led to an upturn in Miami's economy. And since both Miami and Orlando draw workers nationally as well as from the same statewide labor pool, Miami's need for increasingly larger numbers of workers could have begun to reduce Orlando's ability to expand its employment base.

Determining How Individual Economies Interact

S ince the underlying structure of a regional economy has implications for economic forecasters, policymakers, businesses and the general public, it is important to understand both the long-term evolution of particular economies and short-term reactions to factors such as economic shocks. Thus, helping to determine whether MSAs grow independently and how they react to short-run disturbances in surrounding markets is valuable for clarifying how the effects of state level policy changes as well as economic shocks are transmitted among individual MSAs.