Post-Industrial Philadelphia: Structural Changes in the Metropolitan Economy [Reprint 2016 ed.] 9781512807912

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Post-Industrial Philadelphia: Structural Changes in the Metropolitan Economy

Post-Industrial Philadelphia: Structural Changes in the Metropolitan Economy

William J. Stull and Janice Fanning Madden

Ujijl University of Pennsylvania Press PHILADELPHIA

Copyright © 1990 by the University of Pennsylvania Press All rights reserved Library of Congress Cataloging-in-Publication Data Stull, William J. Post-Industrial Philadelphia: structural changes in the metropolitan economy / William J. & Janice Fanning Madden, p. cm. Includes bibliographical references. ISBN 0-8122-8218-3 1. Philadelphia Metropolitan Area (Pa.)—Economic conditions. 2. Philadelphia Metropolitan Area (Pa.)—Industries. I. Madden, Janice Fanning. II. Title HC108.P5S78 1990 330.9748' 11043—dc20 90-30440 CIP Printed in the United States of America

Contents Preface and Acknowledgments List of Tables in Text List of Figures in Text One Introduction History of the Philadelphia Economic Monitoring Project Objectives of this Study Summary of Findings Methods and Data Outline of the Study TWo 1989 Update Overall Economic Trends Trends in Other Metropolitan Areas Trends in the Counties Trends in the Industrial Sectors Trends in the Economic Environment Summary Three The Restructuring of Manufacturing within the Philadelphia Region

vii xi xiii 1 1 2 2 6 9 11 11 13 15 17 19 21 22

Richard E. Bernstein

Comparing Manufacturing Employment within the Region to the Nation Manufacturing within the Philadelphia Metropolitan Area The Growing Manufacturing Sectors within the Region The Distribution of Growth Manufacturing Industry Employment within the Region Summary and Policy Implications Four The Emergence of a Producer Service Economy in the Philadelphia PMSA Defining Producer Services Accounting for Growth in Producer Services Advantages and Disadvantages of Promoting Producer Services Producer Services in Metropolitan Areas throughout the Nation Comparing Producer Services within the Region to the Nation Producer Services within the Philadelphia Metropolitan Area Summary and Policy Implications

22 27 29 42 42 44 44 45 48 56 58 62 64

vi

Contents

Five Growth and Change in Health Care Employment within the Metropolitan Area Erwin A. Blackstone and Kathleen Carr-Possai Comparing Philadelphia's Health Care Industry to the Nation Comparing Philadelphia's Health Education Industry to the Nation Exporting Health Care from the Philadelphia PMSA The Health Care Industry within the Philadelphia Metropolitan Area The Hospital Industry within the Philadelphia Metropolitan Area Summary and Policy Implications

67 69 72 74 76 78 89

Six Research and Development in Pennsylvania and the Philadelphia Metropolitan Area 91 Overview of R&D in the United States Science and Engineering Manpower R&D Expenditures R&D Performers in the Philadelphia PMSA Summary and Policy Recommendations Seven Linkages between Industries in the Philadelphia Metropolitan Area: An Input-Output Analysis Janusz Szyrmer A Description of Input-Output Methods Estimating the Output Effects of Export Expansion Estimating the Employment Effects of Export Expansion Net Exports by Industry Ranking Industries on their Ability to Stimulate the Local Economy Eight Policy Overview Implications for Regional Economic Development Policies Wages and the Post-Industrial Philadelphia Economy

93 94 102 107 112 114 115 116 120 121 121 126 127 131

List of Appendices and Appendix Ihbles

133

Appendix A: Bibliography

135

Appendix B: Supplementary Materials to Chapters 2-7

141

Appendix C: Comparative Industry Data

156

Appendix D: PMSA General Data Ikbles

179

Index

206

Preface and Acknowledgments The Philadelphia Economic Monitoring Project was launched in 1984 at the Wharton School of the University of Pennsylvania under the leadership of Professor Anita A. Summers, with the assistance of Thomas F. Luce, both affiliated with the Department of Public Policy and Management. The purpose of the Project was to provide ongoing monitoring of the Philadelphia metropolitan economy independent of any political or economic interest. Over the next three years the Project produced three studies of the regional economy published by the University of Pennsylvania Press. The first volume, Economic Report on the Philadelphia Metropolitan Area: 1985, provided an overview of the regional economy, an inventory of its strengths and weaknesses, and an analysis of its strongest industries. The second, Economic Development Within the Philadelphia Metropolitan Area (1987), focused on developmental disparities among the eight counties making up the metropolitan area. The third, Local Fiscal Issues in the Philadelphia Metropolitan Area (also 1987), analyzed local government taxation and spending policies in the region. All three volumes achieved wide circulation in the region and are still frequently cited by business leaders, public officials, journalists and other opinion leaders. The present volume commences a new phase in the life of the Project. After the publication of the third volume, Professors Summers and Luce jointly decided to pursue new opportunities. Professor Luce joined the faculty at the Pennsylvania State University; Professor Summers remained at the University of Pennsylvania but became involved in another large research effort. We are continuing the Project as the Temple-Penn Philadelphia Economic Monitoring Project. The goals remain unchanged. Ongoing, independent monitoring of the regional economy is as necessary today as it wasfiveyears ago when the Project was conceived. This study is the first of two that the Project plans to produce between 1988 and 1991. The second study, dealing with the distribution of income within the region, is now underway. It will be completed in the late spring of 1991 and published during the summer. Financial support for continuing the Project came from three sources. The William Penn Foundation awarded a Challenge Grant in the summer of 1987. Matching funds were provided by the Ben Franklin Technology Center of Southeastern Pennsylvania (the regional affiliate of the Commonwealth Ben Franklin Partnership) and the School of Business Management at Ibmple University. Helen Davis Picher continues as the Project's Program Officer at William Penn. Her enthusiastic and informed involvement in our activities and her strong endorsement of the need for complete independence in the research process is greatly appreciated.

viii

Preface and Acknowledgments

Special thanks are also due to Dr. Phillip Singerman, Executive Director of the Ben Franklin Technology Center, and Dr. William Dunkelberg, Dean of the School of Business Management at Temple University, for their interest in and support of the Project. The Project supported research contributions by faculty in Temple University's Economics Department and the University of Pennsylvania's Regional Science Department. Professor Richard Bernstein of Tbmple analyzed the changes in manufacturing within the metropolitan area. Professor Erwin Blackstone, also of Temple, did the same for medical services. Professor Janusz Szyrmer of Penn developed an input-output analysis of the Philadelphia metropolitan economy. Their expertise in these areas gave the study a breadth and sophistication it would not otherwise have had. An outstanding group of graduate and undergraduate students provided research assistance. Kathleen Carr-Possai, a Temple graduate student in economics, served as our Research Associate. She handled all the administrative tasks that college professors instinctively hate to do. She was also involved in the substantive work of the Project, as coauthor with Professor Blackstone of the medical services chapter. Scott Hughes and Mao Ling, also Temple graduate students, served as Research Assistants. Both spent long hours in the library and at the Tbmple computer center generating the raw data for many of the Project's analyses. Hughes was also responsible for the survey of local research and development centers whose results are reported in Chapter 6 and for the description of the survey which appears in Appendix B. Carr, Ling, and James Giammaruti (a Temple undergraduate) helped him in these endeavors. Andrew Haughwout, Toni Horst, and John Tofflemire, Penn graduate students in Regional Science, also served as Research Assistants. Haughwout organized data from the previous studies. Horst assembled and evaluated the data for the Update chapter and Appendix D. She spent many hours tracking down regional data in the library and at various government agencies. She is responsible for the description of data and procedures used in the Update chapter which appears in Appendix B. Tofflemire assembled the County Business Patterns employment data used throughout the volume; he devised procedures for estimating employment data that were missing due to non-disclosure requirements as described in Appendix B; and he prepared the graphics for the study. Other faculty and staff at our universities and elsewhere made substantial contributions. Professor Thomas Reiner of the University of Pennsylvania Regional Science Department reviewed an earlier draft of this manuscript and provided many helpful suggestions. Professor David Elesh of the Temple Sociology Department provided access to his Pennsylvania employment database and explained its strengths and weaknesses. Dr. Kemm Farney, Director of the Cochran Research Center

ix

Preface and Acknowledgments

in the School of Business Management at Temple, was responsible for producing a camera ready manuscript. Wen-Chang Lin, a Temple graduate student and Dr. Farney's Research Assistant, and Susan Galle of AstroComp prepared the tables, a difficult and time consuming task. Professor Judith C. Stull of LaSalle University provided computational expertise at crucial points in the research. Dr. Susan Smith of the Ben Franklin Technology Center supplied us with information on research and development activity in the region. Mr. Alvin Margolis, Regional Commissioner of the Bureau of Labor Statistics (BLS), and Mr. John Velis of BLS provided employment data and assistance in interpreting that data. Ms. Kathryn M. McCombs of the Greater Philadelphia Chamber of Commerce provided data on venture capital; Mr. Webb Christman of the Philadelphia Industrial Development Corporation, a member of the Advisory Committee, provided data on contracting by manufacturers. Professor Thomas Luce answered questions about his work on earlier Project studies. Professor Anita Summers continually took time from her busy schedule to provide ongoing, independent advice and encouragement. This Project owes its existence and continuance to her constant support and enthusiasm. Finally, we wish to thank the members of the Advisory Committee for the time and energy they devoted to the Project. Our meetings with them helped us to focus our work and improve its quality. Several members, in particular, deserve special mention. Dr. Theodore M. Crone, head of the Urban Research Section of the Federal Reserve Bank of Philadelphia, chaired the Committee and provided much useful procedural and substantive advice. He, along with Dr. Phillip Singerman and Professor Anita Summers, provided us with many comments on an earlier draft of this study. Professor Anita Summers and Mr. Alvin Margolis, whose contributions are acknowledged above, also serve on the Advisory Committee. All those involved have our deep appreciation. We remain, however, responsible for any errors. WJ.S. and J.F.M.

Erwin Blackstone and Kathleen Carr-Possai wish to thank the Delaware Valley Hospital Council and especially its chief executive, Charles Pierce, and Joel Telles for their cooperation and assistance. We are also indebted to Joseph P. Fuhr, Jr., and W. Lynn Holmes for valuable comments.

List of Tables in Text This list includes all tables appearing in the main text of this volume. Tables appearing in the appendices are listed on pp. 133-134. Annual Employment Growth Rates for the Philadelphia PMSA and U.S. : 1952-1988 Annual Employment Growth Rates for 20 Large Metropolitan Areas: 1983-1989 Annual Employment Growth, Population Growth, and Unemployment Rates in the Philadelphia PMSA by County: 1980-1988 Annual Employment Growth Rates, Employment Shares, and Location Quotients by Sector and Industry in the U.S. and Philadelphia PMSA: 1972-1988 Manufacturing Employment in 20 Large Metropolitan Areas: 1978-1986 Employment Growth in Manufacturing by Industry for the Philadelphia PMSA and 20 Large Metropolitan Areas: 1978 1989 Manufacturing Employment in the Philadelphia PMSA by County and the U.S. : 1958-1986 Employment Change in Employment Growth Manufacturing Industries in the Philadelphia PMSA and the U.S.: 1978-1986 Number of Firms in Employment Growth Manufacturing Industries by Firm Size Class in the Philadelphia PMSA: 1977, 1987 Employment Change in Employment Growth Manufacturing Industries by Firm Size Class in the Philadelphia PMSA: 1977-82,1982-87 Sources of Employment Change in Employment Growth Manufacturing Industries in the Philadelphia PMSA: 1977-1982,1982-1987 Producer Service Employment in 20 Large Metropolitan Areas: 1978-1986 Employment Growth in Producer Services by Detailed Industry for the Philadelphia PMSA and 20 Large Metropolitan Areas: 1978-1986 Change in Producer Service Employment by County in the Philadelphia PMSA: 1978-1986 Health Service Employment in 20 Large Metropolitan Areas and the U.S.: 1978-1986 Employment Growth in Health Services by Detailed Industry in the Philadelphia PMSA, 20 Large Metropolitan Areas, and the U.S.: 1978-1986 Medical and Dental Education in 11 Large Metropolitan Areas and the U.S.: 1988 Change in Health Service Employment by County in the Philadelphia PMSA: 1978-86

xii

List of Tables in Text

5.5 5.6 5.7 5.8 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 6.12 6.13 7.1 7.2 7.3

Selected Hospital Statistics for 11 Large Metropolitan Areas: 1978, 1982,1987 79 Recent Hospital Performance in the Philadelphia Metropolitan Area: FY1985-1988 83 Profitability Analysis for the Philadelphia PMSA Hospitals Pennsylvania Portion Only. FY1987 & 1988 84 Regional Discharges by County & Hospital Type: FY 1987 County of Patient's Residence 88 R&D Expenditures in the U.S. by Funding Source and Performer: FY1987 93 Science and Engineering Degrees Conferred in the Philadelphia PMSA by Field: FY1975,1980,1985,1988 95 Science and Engineering Degrees Conferred in the U.S., Pennsylvania, and the Philadelphia PMSA : FY1975,1980, 1985 98 Scientists and Engineers Employed in the U.S. and Pennsylvania: 1978,1982,1986 100 Scientist and Engineer Employment in the 20 States with the Highest Concentrations: 1986 100 Employed Scientists and Engineers Living in 20 Large Metropolitan Areas: 1980 101 Federal R&D Obligations by Supporting Agency in the U.S. and Pennsylvania: FY1987 102 Industrial R&D Expenditures by Source in the U.S. and Pennsylvania: 1975,1981,1987 104 Industrial R&D Expenditures by Industry in the U.S. and Pennsylvania: 1985 105 College and University R&D Expenditures by Sources in the U.S., Pennsylvania PMSA: FY1977,1982,1987 106 R&D Establishments and Employment in the Philadelphia PMSA by R&D Employment Size Class: 1989 109 R&D Establishments and Employment in the Philadelphia PMSA by Activity Group: 1989 110 R&D Establishments and Employment in the Philadelphia PMSA by County: 1989 111 Selected Multipliers and Net Export Ratio for Sectors and Industries in the Philadelphia PMSA: 1986 117 Detailed Industries in the Philadelphia PMSA Ranked by Size of Multiplier and Net Export Ratio: 1986 122 Historic Employment Growth Rate, Selected Multipliers, and Net Export Ratio by Sector in the Philadelphia PMSA: 1986 124

List of Figures in Text Manufacturing Share of Total Employment in 20 Large Metropolitan Areas: 1978,1982,1986 Metropolitan Export Indexes for Producer Service and Manufacturing Industries: 1986 Metropolitan Export Indexes for Producer Service Industries: 1975,1982,1986 Metropolitan Export Indexes for Manufacturing Industries: 1978, 1982,1986 Annual Wages in Producer Service and Manufacturing Industries in the Philadelphia PMSA: 1986 Health Service Share of Total Employment in 20 Large Metropolitan Areas: 1978,1982,1986

One

Introduction This is the fourth volume in a planned series of ongoing assessments of the economic climate of the Philadelphia region. Continued objective monitoring, which requires both the compilation and the careful interpretation of economic data, is necessary for informed decision making by actors in both the public and private sectors. Local government officials must determine the mix of public services to provide, the taxes to levy, and the appropriateness of regulating land use. Public utilities and other private businesses must anticipate the level and location of the capital investment required to serve future demand for their goods and services. Both public and private organizations that encourage the economic development of the region need unbiased appraisals of the economic viability of various industries in the region. The Philadelphia Economic Monitoring Project is designed to provide these decision makers with some of the economic data and analyses necessary for their very important choices.

Histoiyofthe Philadelphia Economic Monitoring Project

The first volume in this series, Economic Report on the Philadelphia Metropolitan Area: 1985, identified, for the regional economy as a whole, the economic events preceding the current expansion in the region. These events included the decentralization of population and employment within the metropolitan area and the substantial decline in manufacturing employment. The volume recognized high technology manufacturing sectors (including pharmaceuticals, office computing equipment, and chemicals) and nonmanufacturing activities (including finance, insurance, real estate, business services, and health services) as the industries that had experienced the greatest growth. Finally, it identified the strengths (including declining relative labor costs in manufacturing, low housing and office space costs, a high level of amenities, and strong state economic development policies) and weaknesses (including lack of venture capital, deteriorating infrastructure, and low levels of intergovernmental assistance) in the economic climate. The second volume, Economic Development Within the Philadelphia Metropolitan Area, 'examined variation in the extent to which different communities within the region participated in the economic expansion. It identified the powerful effect of preferences for low density living on the economic map of the region. Jobs and workers decentralized, daily interaction between the suburban counties and the city of Philadelphia decreased, the suburban counties (particularly Bucks, Burlington, and Montgomery) emerged as the expanding and flourishing parts of the

2

Introduction

region, and the city of Philadelphia in 1986—though it shared in the region's good health—stood apart from the other counties in its poverty, its employment and population declines, and the income, average education, and unemployment levels of its residents. The third volume, Local Fiscal Issues in the Philadelphia Metropolitan Area, addressed the fiscal implications of the geographic shifts in the area economy. The suburban low density communities face fewfiscalproblems. They have increased their public expenditures in response to the increased demand arising from the increase in residents and business activity. The increases in residents and in business activity provided the tax revenues necessary to finance the expansion of public services. The older, more densely settled cities do face significant fiscal problems. The relative increases in the poverty population in these cities (Philadelphia, Chester, and Camden) increased the demand for public expenditures. However, the overall decline in residents and in business activity required (in the absence of improvements in the productivity of public service delivery) that these cities finance increases in public expenditures, either by increasing the tax burden on remaining residents and businesses or by intergovernmental transfers. Tax burdens have risen in Philadelphia relative to other municipalities. One source of additional revenue, increases in the city wage tax, has been demonstrably counter productive. The increases have cost the city a substantial number of jobs. Objectives of this Study

The decline in manufacturing employment, the rise in nonmanufacturing employment, and the decentralization of residents and jobs have been previously identified by the Philadelphia Economic Monitoring Project as the dominant forces shaping the regional economy. The present study examines the particular nonmanufacturing and manufacturing industries that have experienced employment growth within the metropolitan area, in order to determine the reasons for their past growth and to assess their potential for further expansion. On the basis of previous studies, we selected the nonmanufacturing industries of producer services, health services, and research and development (R&D) as sectors that have participated in the region's economic expansion in the 1980s. In addition, we analyze those manufacturing industries that have experienced employment growth over this period.

Summary of Findings

The Temple-Penn Philadelphia Economic Monitoring Project's analyses of the industrial sectors that have led the transformation of the Philadelphia economy from a manufacturing base to a service base, that is, to a post-industrial economy, produce the following major conclusions:

Introduction

3

Current Status of the Area Economy Since 1987, there has been a marked slowing of growth in the region, both relative to the nation as a whole and relative to other large metropolitan areas. • The slowdown relative to the nation is most pronounced for nonmanufacturing employment in the suburban counties. The substantial drop in unemployment rates in the suburban counties in recent years may indicate that a labor shortage in suburban labor markets is slowing growth there. • While unemployment rates have dropped below the national average in both the city and its suburbs, the drop has been much greater in the suburbs. The city-suburban differential in the unemployment rate is higher at the end of the 1980s than it was at the start of the decade. This suggests that residents of the central city are not currently employable in the jobs opening up in the suburban areas. • The city of Philadelphia has experienced some growth in population and employment since 1985, a reversal of the losses in population and employment that it has experienced since soon after the end of World War II.

The Transformation of the Local Manufacturing Economy Less than 400,000 workers in the Philadelphia metropolitan area are currently employed in manufacturing industries. • Within the United States, there has been a steady, long term decline in manufacturing employment within larger metropolitan areas. Furthermore, there has been a steady, long term decline in manufacturing employment in central cities relative to their suburbs. Trends in manufacturing within the Philadelphia region are consistent with these national trends. Although Philadelphia still includes relatively more manufacturing employment than other metropolitan areas, Philadelphia is less specialized than the nation in most manufacturing industries. Manufacturing activity (printing and construction materials, for example) within the region is increasingly oriented to serving local demand. As a result, there is less likelihood that relocation of this employment will result in substantial job losses within the region.

4

Introduction

• For 31 manufacturing industries, employment within the Philadelphia metropolitan area grew between 1978 and 1986. These 31 industries grew almost twice as fast in the region as they did in the nation, while the other area manufacturing industries declined at a faster rate in the region than they did in the nation. • The 31 industries that experienced employment growth within the metropolitan area were producers of high technology equipment or served local markets that were relatively inaccessible to businesses located elsewhere. Some sectors, such as pharmaceuticals, ordnance, communications equipment, electrical equipment, aircraft and parts, optical instruments, and medical instruments, are producing high technology outputs that are exported from the region. Others, such as plastics and printing, are changing rapidly in their use of high technology inputs and require proximity to the sites where these inputs are being developed. Others, such as sawmills, cement products, and millwork, have experienced significant increases in local demand arising from the recent construction boom in the area. • Among the growing manufacturing sectors, smaller firms accounted for more employment growth than larger firms, and expansion of existing firms created significantly more jobs than the opening of new firms. The Emergence of a Local Producer Service Economy Producer services, services purchased by business establishments to assist in the production of a good or another service, employ over 400,000 workers in the metropolitan area. • Producer service employment has grown faster than employment in other sectors throughout the metropolitan area. The increase in the proportion of workers employed in producer services has been especially pronounced in the central city in the 1980s. • Nonetheless, both the absolute level of and the growth in producer service employment over the last decade within the Philadelphia metropolitan area has lagged behind that of other metropolitan areas. Local growth in producer service employment has arisen largely in response to increases in the demand from local businesses. Only in insurance, and possibly in legal services, is there any evidence that a significant proportion of clients are from outside the Philadelphia region. There is little evidence that producer services can be an important export sector for the long term in this region, or in any region. The quality and quantity of

Introduction

5

locally available producer services are important contributors, however, to the overall exporting competitiveness of other local industries. • Because the insurance sector is becoming more evenly distributed across regions, it is unlikely that there will be significant increases in local employment in this sector. Philadelphia will be doing well to maintain its current national share. • Philadelphia businesses appear to be importing more data processing and software services from outside the metropolitan region than is the case in other regions. Importation of these services from outside the Philadelphia region appears to be increasing at the same time that businesses in other regions are increasingly using local producers of these services. Philadelphia may be poised for an expansion of computer software and data processing employment. • Legal services have grown faster in Philadelphia than in other metropolitan areas, and it appears that this may be due to some exportation of these services outside the region. The region's legal services have become increasing concentrated in the city of Philadelphia.

Philadelphia as a Health Center Over 10% of Philadelphia workers are employed in health care services. • Philadelphia has become more specialized in health care services over the last decade. • This specialization has arisen from the region's position as a center for health education and as an exporter of health services to patients from outside the region. • The health care industry is undergoing a substantial restructuring both in this region and nationally. Employment in various types of outpatient facilities and nursing homes is growing while employment in hospitals is declining. • Philadelphia has an excess capacity in hospitals that may require the closing of up to five or six area hospitals in the next few years.

Research & DevelopmentActivities within the Region Approximately 30,000 workers are currently engaged in R&D activities in the region, roughly 1.2% of the regional labor force. • The Philadelphia metropolitan area has the typical amount of R&D activity for a region its size.

6

Introduction

• R&D employment in the region is concentrated in a small number of large establishments, the majority of which are subsidiaries of major corporations. • R&D employment is also concentrated in a few activity groups: aerospace, chemicals, electronics/computers, pharmaceuticals, biology/biotechnology, and medicine. The medical/biology sector — defined as the pharmaceuticals, medicine, medical technology, and biology/biotechnology groups—accounts for nearly half the R&D employment in the region. • Over three-quarters of the region's R&D employment is located in Philadelphia and Montgomery Counties, with the latter being the dominant location. • Colleges and universities in the region confer somewhat fewer science and engineering degrees relative to overall employment than do colleges and univeristies in Pennsylvania and the nation.

Linkages between Industries within the Region • Industries selected as targets for economic development strategies should have strong linkages to the local economy. Expansion of industries that purchase their inputs locally and use local labor has a greater effect on local economic growth than that of industries with few ties in the region. • Expansion of nonmanufacturing industries has a much greater effect on Philadelphia metropolitan growth than does expansion of manufacturing industries, because nonmanufacturing industries have stronger linkages to other local industries. Methods and Data

Economic monitoring of detailed industries within metropolitan regions requires development of extensive data bases and the analysis of the data with a variety of empirical and theoretical techniques. Methods The analyses undertaken in this study require comparisons of intrametropolitan and intermetropolitan variations in employment, output, and in other inputs within narrowly defined industrial sectors in order to ascertain how the local economic climate, the national economy, and the specific industrial climate create expansion or contraction of an industry's employment within the metropolitan area. A variety of descriptive statistical techniques—including simple comparisons of levels and of growth rates between geographic areas and cross tabulations of economic data—are employed to assist in interpreting what the objective data tell us

Introduction

7

about the status of the local economy. 1\vo more complicated, but widely used, techniques for analyzing urban and regional economies are also utilized in this study: location quotients and input-output analysis. Location Quotients. The location quotient is an index, usually based on employment, that shows the relative specialization of a region in an industry (see Isard, 1960, for a detailed discussion). The location quotients used in this study are calculated by dividing the proportion of the region's employment in a particular industry by the proportion of the nation's (or other geographical unit's) employment in the same industry. If a location quotient for a particular industry equals one, then the regional share of employment in that industry equals the national (or other geographical unit) share and there is no regional specialization in the industry. If a location quotient is greater than one, then the regional share of employment in that industry exceeds the national share and the region is specialized, relative to the nation, in that industry. If a location quotient is less than one, then the regional share of employment in that industry is less than in the nation and the region is less specialized in that industry relative to the nation. Indicators of regional industrial specialization, such as location quotients, are frequently used to delineate the patterns of net trade among metropolitan regions within the United States. Industries that produce more output within the region than is consumed within the region are described as net export industries1. Net export industries are expected to have location quotients greater than one. Conversely, industries with location quotients greater than one are likely to be net exporters from the region. Location quotients for industries in which local production levels match local consumption levels, such as local service industries, are expected to equal one. Conversely, industries with location quotients equal to one are likely to serve local demand. When an industry's location quotient is less than one, the region is likely to be a net importer of that industry's output. Location quotients are only rough, descriptive indicators of regional export industries, or industries of regional specialization. Regional differences in such items as consumer tastes and needs, levels of income, family composition, unionization, capitalization, and natural resources, as well as the actual level of exports from an industry, also affect the size of the location quotient. Location quotients are useful in suggesting which industries are a region's export industries. Location quotients often provide the only data on regional trade patterns in industries where there are no freight or taxation records that reflect regional flows of goods and services. Location quotients, however, can not "prove" that any industry actually exports from the region.

8

Introduction

Input-Output Analysis. Input-output analysis is a social accounting technique which measures interindustry transactions, permitting an analysis of the interdependence of industries within a regional economy. Both the technique and the results of its application to the Philadelphia economy are presented in detail in Chapter 7. Data It is very difficult to obtain reliable data on narrowly specified industries at county or local levels. Data availability creates important constraints on the timeliness of studies of specific industries in small geographic units and on the locational and industrial detail with which economic activities can be analyzed. There are two alternate sources of detailed industrial employment data at the county level for all metropolitan areas in the United States: the Bureau of the Census County Business Patterns and the Bureau of Labor Statistics Employment and Earnings. These data sources are both produced by the federal government. They are collected under a standard set of definitions and procedures which make the data comparable across industries and counties within each series. However, the data on specific industries in specific counties can and do vary significantly between these two sources. The County Business Patterns data are based on universe files and are therefore not subject to sampling errors. While the data are subject to nonsampling errors, the reported data have been more carefully verified with respect to the correct coding of industries and to the specific county locations where jobs are performed, but the verification process makes them less timely. For example, 1986 is the most recent year for which these data were available at the time this manuscript was produced. The estimates of employment from Employment and Earnings are released on a more timely basis, but are not as accurate nor as detailed. These estimates are based on monthly reports by a sample of employers in each industry. Periodic adjustments are made based primarily on changes in state unemployment insurance data. These estimating and adjustment techniques can create substantial variation in employment estimates for detailed (2, 3 or 4 digit SIC codes) industries in small geographic units (counties). Both County Business Patterns and Employment and Earnings withhold data on employment when the disclosure of such data may reveal the operations of an individual employer. Censoring of employment data is more likely to occur for county level data when the industry is more narrowly specified, and for a narrowly specified industry when geographic units are small, such as counties. Censoring of employment data at the county level occurs occasionally when industries are defined at the two digit SIC code level and frequently at the three digit level. For example, in the

Introduction

9

1986 County Business Patterns, employment data were censored for 52 three digit SIC code manufacturing industries in Philadelphia County and for 62 in Bucks County. In the 1986 Employment and Earnings, employment data were censored for 31 three digit SIC code manufacturing industries in Philadelphia County and for 45 in Bucks County. We used the data available on the number of firms in the county and in the industry, and on the total employment at more aggregated SIC code levels, to estimate the censored employment data. Appendix B.2 describes in more detail how these data were estimated. Outline of the Study

Chapter 2 of this volume updates the 1987 study on the economic trends in the region as a whole, and in each of its counties and industrial sectors. Chapter 3 describes the changes over the last decade in the structure of manufacturing employment within the Philadelphia metropolitan area. The chapter also analyzes the unique attributes of the 31 manufacturing industries that not only experienced employment growth within the region while other manufacturing industries declined, but also experienced greater employment growth than firms in the same industries located elsewhere in the nation. Chapter 4 describes the growth over the last decade in producer service industries within large metropolitan areas, and discusses whether producer service firms are appropriate targets for economic development efforts. The chapter investigates the comparative advantage of the Philadelphia region in producer services. Chapter 5 describes the sources of national and local growth in employment in the health care industries and discusses how employment is likely to change locally within those industries in the future. Chapter 6 analyzes R&D activity within the state and region. Because R&D laboratories are often auxiliary enterprises to firms primarily engaged in other industries, it is impossible to ascertain the extent of R&D activity within the region from County Business Patterns and Employment and Earnings data. Therefore, in this chapter, we present data from our own area survey, as well as from other sources, to ascertain the strengths and weaknesses of R&D activity within the region. Chapter 7 presents the results of a 1986 input-output analysis of the Philadelphia metropolitan region. Input-output analysis is used to determine the extent to which various industries within the region are linked to one another and to the overall local economy. The likely employment and local output effects of expansion of local industries are estimated. Chapter 8 reviews the policy options that flow from the conclusions summarized above and detailed in each of these chapters.

10

Introduction

Notes 1. Because these indicators only show net, as opposed to gross, levels of export or import, some firms within industries that serve local demand (i.e., are not net exporters) may actually export significant proportions of their output from the region. This occurs when some of the industry's local demand is met by imports from outside the region.

Two

1989 Update The first three volumes of the Philadelphia Economic Monitoring Project concluded that the economy of the metropolitan area had undergone a major structural transformation which enabled it to grow more rapidly in the 1980s than it had in earlier decades. The transformation was both industrial and geographic. The proportion of the region's employment in manufacturing fell sharply over the postwar period, while that in nonmanufacturing, particularly services, increased. The proportion of the region's employment in the city of Philadelphia declined, while that in the seven county suburban ring rose. By the mid 1980s the core-dominated industrial metropolis of the prewar period described by Warner (1968) and other historians had been almost entirely replaced by a diversified, multi-centered metropolitan region with an economy based more on suburban services than on city manufacturing. The performance of this economy was strong. Regional employment growth exceeded that of the nation and the regional unemployment rate fell below the national rate. On the basis of this performance, the earlier volumes of the Project were optimistic about the future. Manufacturing employment, particularly in the city of Philadelphia, would continue to decline, but this shortfall would be offset by rapid growth in nonmanufacturing employment, concentrated in the suburbs. Now, two years later, a somewhat different picture of the regional economy is emerging. The industrial and geographic transformation of the region has continued and is the principal subject of subsequent chapters. The growth rate of the region, however, has fallen below those of the nation and other large metropolitan areas. The slowing of nonmanufacturing employment growth in the suburban counties accounts for much of the slowdown in the region's economy.

Overall Economic TVends

Documentation of the slowdown of the Philadelphia metropolitan economy is presented in Table 2.1. This table shows annual growth rates in total, manufacturing, and nonmanufacturing employment for the PMSA and its central city and suburban components. Average annual growth rates for the periods 1952-1972 and 1972-1983 are provided for historical perspective. Data for the nation serve as benchmarks. (Data sources and computational methods used here and elsewhere in the chapter are discussed in detail in Appendix B.l.) The optimism of previous volumes of the Project was based on the continually improving performance of the regional economy from 1983 through 1986 relative to that of the nation. In 1983-84 (1983-1Q to

12

1989 Update

Thble 2.1 Annual Employment Growth Rates for the Philadelphia PMSA and U.S.: 1952-1988(a) 1952-72

1972-83

1983-84

1985

1986

1987

1988

PMSA Total Employment Manufacturing Nonmanufacturing

1.00% -0.82 1.95

0.60% -2.36 1.55

3.57% 2.02 3.96

2.28% -3.22 3.65

2.72% -3.64 4.22

2.38% -0.27 2.96

1.18% -1.46 1.73

Philadelphia Total Employment Manufacturing Nonmanufacturing

-0.61 -2.82 0.35

-1.54 -5.66 -0.56

0.15 -2.81 0.66

1.10 -4.83 2.08

1.05 -4.28 1.86

1.72 -1.35 2.16

0.75 -2.49 1.19

Rest of PMSA Total Employment Manufacturing Nonmanufacturing

3.31 1.35 4.64

2.30 -0.58 3.43

5.77 3.95 6.34

2.98 -2.64 4.68

3.74 -3.41 5.74

2.76 0.10 3.45

1.42 -1.12 2.06

United States Total Employment Manufacturing Nonmanufacturing

2.08 0.71 2.67

1.85 -0.32 2.51

4.26 3.81 4.37

2.39 -1.76 3.44

2.17 -0.96 2.93

3.61 2.63 3.80

3.46 2.10 3.63

Sources: Employment and Earnings, Bureau of Labor Statistics, U.S. Department of Labor. County Business Patterns, Bureau of the Census, U.S. Department of Commerce. (a) Growth rates for 1983-1984 are from 1983-1Q to 1985-1Q. Rates for 1985,1986,1987, and 1988 are from the first quarter of the year to the first quarter of the following year.

1985-1Q) the employment growth rate for the region was 0.69 percentage points below the corresponding national rate; in 1985 it was 0.11 points below; and in 1986 it exceeded the national rate by 0.55 points. Unfortunately, 1986 now appears to have been the highwater mark for the regional economy in the 1980s. In 1987 the PMSA employment growth rate fell below the national rate and in 1988 the gap increased. The national economy is once again growing faster than the regional economy, a condition which prevailed throughout the 1970s. Within the metropolitan area, the suburban ring continues to outperform the city of Philadelphia. The suburban employment growth rate exceeded the city's in both 1987 and 1988. The difference between the two rates, however, declined dramatically—from 2.69 percentage points in 1986 to 0.67 points in 1988. This convergence, which continues a trend from the early 1980s, is the result of a sharp decline in the suburban growth rate

1989 Update

13

after 1986 and a more modest decrease in the Philadelphia rate. The city and suburban employment growth rates are closer than at any time in the past decade. In the region, manufacturing employment continued to decline in 1987 and 1988, but at rates lower than in the recent past. Manufacturing employment in the nation increased in both 1987 and 1988 after declining through most of the 1970s and early 1980s. This turnaround has been attributed to the decline of the dollar, moderate growth in labor costs, and improvements in productivity (Erceg and Bernard, 1988). The improvement in the nation was somewhat greater than in the region; the gap between the national and regional manufacturing growth rates rose from 2.68 percentage points in 1986 to 3.56 points in 1988, an increase of 0.88 points. Within the region, the rate of decline decreased in both Philadelphia and the suburbs. Nonmanufacturing employment increased in the region, but at a slower rate than earlier in the decade. National nonmanufacturing employment increased in 1987 and 1988 at rates above those in 1985 and 1986. As a result, the regional nonmanufacturing growth rate went from 1.29 percentage points above the national rate in 1986 to 1.90 points below it in 1988—a growth gap of 3.19 points, 2.31 greater than in manufacturing. Here the suburbs led the decline: the suburban growth rate fell 3.68 percentage points over this period while the Philadelphia rate fell only 0.67 points. T\vo principal conclusions can be drawn from these comparisons. First, the deterioration in the region's recent economic performance relative to the nation's is the result of both continuing declines in manufacturing employment in the city of Philadelphia and a sharp slowing of nonmanufacturing growth in the suburbs, with the latter probably the more important. Second, the convergence of city and suburban employment growth rates since 1986 has occurred primarily because employment growth in nonmanufacturing slowed much less in Philadelphia than in the surrounding counties. The common factor in these conclusions is the relatively slow growth of the suburban nonmanufacturing sector. A possible explanation for this slowdown will be proposed later in the chapter. It-ends in Other Metropolitan Areas

The recent growth experience of other large metropolitan areas shows the effects of national economic changes on large urban areas. Table 2.2 gives annual growth rates from 1983 to 1989 for 20 large PMSAs or MSAs in the nation.1 The underlying employment data were obtained from the same source, the Bureau of Labor Statistics (BLS), as for Table 2.1, but the rates

14

1989 Update

were calculated from March to March (of the years listed) rather than from first quarter to first quarter. The growth rates for the Philadelphia PMSA and the nation thus differ slightly from those in the earlier table. The 20 metropolitan areas as a group showed strong employment growth from 1983 to 1985 as the nation recovered from the recession of the early 1980s. Growth slowed in 1985 (listed as 1985-86) and 1986 (1986-87), increased in 1987 (1987-88), and fell sharply in 1988 (1988-89). In the 1983-85 period these areas grew at the same rate as the nation; thereafter they grew more slowly. Recently, the Philadelphia region's growth performance has deteriorated relative to that of its peers. In 1986 the region grew more rapidly than the 20-area average, in 1987 at the same rate, and in 1988 more slowly. Among the metropolitan areas in the Northeast, its growth performance during this period was average: superior to New York, Newark, and Nassau (N.Y.); about the same as Pittsburgh and Cleveland; Ibble 22 Annual Employment Growth Rates for 20 Large Metropolitan Areas: 1983-1989 1983-85

1985-86

1986-87

1987-88

1988-89

Anaheim Atlanta Baltimore Boston Chicago Cleveland Dallas Washington, D.C. Denver Detroit Houston Los Angeles Minneapolis Nassau, N.Y. Newark New York Philadelphia Pittsburgh San Francisco St. Louis

7.65% 7.85 3.80 4.39 5.60 2.39 8.31 6.48 4.14 5.97 0.73 4.04 5.75 4.96 4.16 2.41 326 0.51 2.85 3.45

4.74% 5.03 2.14 1.51 0.15 1.09 3.05 4.26 -0.85 3.51 -1.83 2.37 1.12 2.85 0.55 1.80 2.07 0.06 1.09 3.52

4.04% 1.13 3.68 2.29 2.26 1.23 -1.50 4.69 -1.96 1.88 -5.42 2.43 3.96 2.86 1.30 1.40 232 1.23 0.57 2.32

5.12% 4.19 3.39 2.52 3.32 1.74 1.07 4.79 0.95 1.38 3.78 2.57 3.26 1.84 0.67 1.24 2.62 2.71 1.21 1.88

2.10% 1.48 1.42 1.23 1.11 2.57 0.27 3.68 -0.06 2.60 2.80 2.27 2.72 0.73 0.94 -0.09 0.88 1.33 1.78 0.82

Total 20

4.33

1.95

1.71

2.66

1.51

Nation

4.33

2.19

2.32

3.39

3.06

Area

Source: Employment and Earnings, Bureau of Labor Statistics, U.S. Department of Labor.

1989 Update

15

and inferior to Boston, Baltimore, and Washington, D.C. Overall, these comparisons suggest that the Philadelphia PMSA's poor growth performance relative to the nation's in recent years is due in part to factors common to all large metropolitan areas in the country and in part to factors particular to the older metropolitan areas in the Northeast. Tbends in the Counties Employment growth, population growth, and unemployment rates for each of the eight counties in the Philadelphia PMSA and for the PMSA as a whole are presented in Tkble 2.3. The employment growth rates were calculated from Pennsylvania and New Jersey Office of Employment Security (OES) data rather than the BLS data used in Tables 2.1 and 2.2, because the latter are not available at the county level. The OES data are not compiled in the same way as the BLS data and are not available for all states. The growth rates shown in the table are thus not entirely consistent with those presented earlier; we use them only for intraregional comparisons. The discussion in this section focuses on events after 1985. Total employment generally increased across the counties in both 1986 (listed as 1986 to 1987) and 1987 (1987 to 1988), but (as shown in Table 2.1) growth rates were systematically higher in the seven county suburban ring than in Philadelphia. Burlington and Gloucester showed the most buoyancy during the period with Bucks, Chester, and Montgomery also exhibiting strong growth. The performance of the manufacturing sector was spotty. Total manufacturing employment declined, but not uniformly over time and space. Philadelphia and Camden showed declines in both 1986 and 1987 while the other counties experienced either growth or no change in at least one of the two years. Montgomery showed strong growth in both years. Employment growth in the nonmanufacturing sector was consistently positive throughout the region, with rates highest in Burlington, Gloucester, and Chester and lowest in Philadelphia. Only Bucks and Montgomery experienced approximately equal growth rates in manufacturing and nonmanufacturing employment. In the others, growth rates in nonmanufacturing far outstripped those in manufacturing. The preliminary population estimates of the Bureau of the Census show that population growth in the region averaged slightly less than 1% per year in the region in 1986 and 1987, higher than earlier in the decade. Except for Philadelphia in 1987, the population of each of the counties increased in both years with the outer counties growing more rapidly. The experience of Philadelphia is noteworthy. After several decades of steady decreases in population and employment, both increased somewhat in the mid 1980s, although in 1987 population is estimated to have declined at a rate equivalent to the early 1980s.

16

1989 U p d a t e

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Health Care Employment

81

metropolitan areas. The number of hospital beds in the region decreased from 20,988 in 1978 to 20,759 in 1987. The number of beds in the other 10 large PMSAs listed also decreased from 197,553 to 181,992, again representing a greater decrease than for Philadelphia. For all the nation's metropolitan areas, the number of hospital beds increased from 725,444 to 741,391. The decrease in hospital beds in Philadelphia resulted in a slight decrease in the number of beds per 1,000 population, from 4.4 to 4.3 for the region. For the nation as whole, the number of beds per 1,000 population declined from 4.6 in 1978, a higher level than in Philadelphia, to 4.0 in 1987, a lower level than in Philadelphia. As a result, Philadelphia in 1987 had more hospital beds relative to its population than the nation. Within Philadelphia and other large metropolitan areas, the number of hospitals and hospital beds decreased over the period of study. For metropolitan areas as a whole, the modest growth in the number of hospitals and hospital beds lagged behind population growth, resulting in a decline in the ratio of hospital beds to population.

Hospital Utilization Indicators of hospital utilization, reported in Table 5.5 and in Table C.4 in Appendix C, demonstrate how the role of hospitals in health care is changing. Nationally, hospital admissions rose 9% between 1978 and 1982, from 25.75 million to 28.1 million, and declined to 25.6 million by 1987, a decline of 8.8%. Hospital admissions within Philadelphia and the 10 large metropolitan areas listed followed a similar pattern, although Philadelphia admissions did not change as drastically. Admissions to Philadelphia area hospitals increased by 4.4% between 1978 and 1982 and declined by 3% between 1982 and 1987. Using admissions per 1,000 population as the standard, the nation's hospitals decreased admissions by 2% but Philadelphia increased admissions by 5%. Within Philadelphia and within all metropolitan areas, the average length of stay was stable between 1978 and 1982, but declined significantly after 1982. The national average length of stay decreased 8.3%, from 7.8 to 7.2 days. For Philadelphia hospitals, the average stay decreased 15.6%, from 8.9 to 7.7 days, but remained above the national average. The number of admissions and the length of stay for admitted patients determine the actual number of days patients occupy hospital beds. The occupancy rate, which is the ratio of actual patient days to the maximum patient days the hospitals could accommodate if all beds were occupied 100% of the time, provides an index of capacity utilization. Nationally, the occupancy rate increased slightly from 76% to 78% between 1978 and 1982, and then declined sharply to 68% in 1987. The Philadelphia PMSA experienced a similar pattern but with higher overall occupancy rates for

82

Health Care Employment

the period: from an 83% occupancy rate in 1978 to 84% in 1982 to 75% in 1987. Philadelphia had the second highest occupancy rate among the metropolitan areas in 1987, surpassed only by the New York City region. The low occupancy rates suggest substantial excess capacity in the nation's hospitals and some excess capacity within the Philadelphia region. On the conservative assumption that 80% utilization reflects full capacity, about 119,000 of the nation's 741,391 hospital beds are unnecessary. By the same criterion, Philadelphia in 1987 would have almost 1400 excess beds out of its total of 20,759. The cost of such excess capacity would be substantial, ranging from $11.4 to $22.7 million annually. As the average hospital in the region has 247 beds, it would imply that five or six existing hospitals might not be required. Several additional concerns are involved, however, in determining the actual number of hospitals and beds that the region can productively use, including geographic access to hospitals for patients and access to education for practitioners. Furthermore, the excess capacity might serve to moderate increases in hospital charges.

Employment in Hospitals The data in Table 5.2 indicate that hospital employment growth has been slower than in other health care industries and that the growth rate has slackened considerably after 1982. Hospital employment did not decline as much as hospital usage, so that hospitals have become more labor intensive. As the average length of stay has decreased, hospitals are treating sicker patients requiring more labor. Philadelphia has not experienced as much slowing of hospital employment growth since 1982 as other regions. The region's relatively greater employment growth is due in part to relatively greater demand for hospital services. However, the employment growth is also due to the greater labor intensity of Philadelphia hospitals. Since 1982, Philadelphia hospitals have had a slightly higher ratio of personnel per inpatient day than all metropolitan area hospitals. (For example, Tfoble C.4 indicates that in 1987, it was 1.1% higher than the national average.) The greater labor intensity of Philadelphia hospitals may arise from sicker patients, in that patients arriving from other regions are likely to be sicker than those seeking local treatment.

Explaining the Relative Decline in Hospital Usage The decreasing role of hospitals in providing health care both nationally and within the Philadelphia area arises from the efforts of the federal government and other third party payers to exercise cost containment in this industry. The single most important change occurred in 1982, when Medicare shifted to a fixed price payment system (PPS) for hospitals.

83

Health Care Employment

Under this system, hospitals receive a fixed price for each of 467 illnesses or diagnostic related group (DRG) categories, regardless of expenses incurred (e.g., tests, length of stay). The reimbursement level is calculated for each hospital according to a complicated formula. Private insurance companies and the Medicaid program have also adopted the DRG concept for reimbursement. This system creates incentives for hospitals to admit patients, but to release them sooner. Progress in the development of medical treatments has also enabled "in office" procedures to replace hospital procedures. Many orthopedic surgeons provide physical therapy through their own offices rather than prescribing hospital physical therapy. Cancer therapy and eye surgery is frequently performed outside hospitals. Philadelphia area hospitals had fewer outpatient visits in 1987 than in 1978 (Tkble C.4). Further reductions in inpatient hospital care are probable as less costly care alternatives become available.

Financial Stability of Philadelphia Hospitals Given the existing substantial excess capacity for hospitals in the region, prices and profits (or surpluses, the comparable term for not-for-profit institutions) are expected to be low enough to induce contraction in or exit from the industry. In fact, Table 5.6 indicates that the number of area hospitals with operating and net income losses increased substantially and industry profitability declined greatly between 1985 and 1988. Table 5.7 provides data on hospitals in the Pennsylvania portion of the PMSA that permit further analysis of the situation. (Comparable data for the New Jersey counties in the PMSA were unavailable.) Specialty hospitals (e.g., a hospital providing only eye care) was the only profitable segment of the acute care hospital industry within the city of Philadelphia Ihble 5.6 Recent Hospital Performance in the Philadelphia Metropolitan Area: FY1985-1988

Hospitals Surveyed Net Income as % of Revenue^ Hospitals with Operating Losses Hospitals with Net Income Losses^

1985

1986

1987

1988

45 6.7 11 0

45 6.7 2 0

48 5.0 12 7

57 2.0 28 25

Source: Calculated from figures compiled by Gilbert Gaul and reported in various issues of the Philadelphia Inquirer.

(a) Hospital net income includes income from all sources, including gifts and endowment.

84

Health Care Employment

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