Nevada Fields One of Nation's Least Diversified Economies

LAS VEGAS -- In an effort to recover from double-digit unemployment, record home foreclosures and widespread bankruptcy, Nevada faces a major hurdle -- one of the nation's least diversified economies.

When economist Jeremy Aguero of Applied Analysis in Las Vegas gave the Nevada Development Authority a presentation in January on Nevada's economic future, he reported that the state had the nation's third least diversified economy, exceeding only Wyoming and Washington, D.C.

It wasn't the first time Nevada ranked so low in that category. A state agency in Hawaii found in 2008 that Nevada ranked 49th in economic diversification in 1990 and 2000 and 48th in 2006. The only positive note was that Nevada became more economically diversified over the years. In 1990, Nevada was 60 percent as diversified as the national average. By 2006, the state was nearly 73 percent as diversified.

Aguero found more good news in that Nevada improved its diversification better than any other state in a 10-year period through November 2011. Still, Nevada remained near the bottom in economic diversification.

Aguero presented other telling data that explained why. In Southern Nevada, where a majority of the state's population resides, there are 3.3 times as many leisure and hospitality jobs as the national average. But there are only one-fourth the normal number of manufacturing jobs and less than 60 percent of what is the norm for education and health services and information jobs. The Las Vegas metro area also has barely more than two-thirds of the government jobs as the national average.

"You don't want to abandon the industries that got you where you are because that would be economic cannibalism," Aguero said. "But you want to get good at multiple things."

Separate data from the Nevada Department of Employment, Training and Rehabilitation shows that more than 32 percent of the jobs in the Las Vegas metro area in November were in leisure and hospitality. The mix of jobs in Southern Nevada is roughly the same as it was in 1999 with two major exceptions. Professional, business, education and health services accounted for nearly 22 percent of the workforce last year, compared to less than 16 percent in 1999. But construction workers barely made up 5 percent of the labor force in 2011, less than half of what they did in 1999.

The latest evidence points to even greater emphasis on the tourism industry, at least in the short run, as Las Vegas attempts to recover from the worst economic downturn since the Great Depression. Employment in the Las Vegas metro area was up 5,900 in January compared to the same month in 2011, led by an increase of 10,500 jobs in leisure and hospitality, according to the Nevada Department of Employment, Training and Rehabilitation. But that means there was a net loss of 4,600 jobs outside the tourism industry.

Trade, transportation and utilities added 3,200 jobs, and education and health services grew by 800 workers. But there were 4,600 fewer government jobs, and declines in professional and business services (down 2,800), financial activities (down 1,400) and construction (down 1,300). 

One argument in favor of diversification is that during economic hard times, communities with a more varied mix of industries stand a better chance of recovering. Las Vegas has had such a difficult time because it relies so heavily on a single industry, tourism, that is driven by discretionary spending on gaming and entertainment.

As the Great Recession discouraged tourists from spending money, Las Vegas had relatively little to fall back on. The housing crisis only made matters worse as many Southern Nevada residents lost their homes while others lost their jobs. Many lost both.

Two economists at the Federal Reserve Bank of New York's Buffalo branch concluded in a 2002 essay that "diversified economies grow faster than those concentrated in select industries." Richard Deitz and Ramon Garcia wrote that more diversified economies spur productivity and innovation.

"A manufacturer of automobiles, for example, will need materials and parts such as steel, tires and windows, as well as the services of advertising agencies, banks and lawyers," they wrote. "In a diverse economy that encompasses many types of businesses, firms often have ready access to needed goods and services. Moreover, because these firms can choose from among a number of suppliers, they may pay less for goods and services than firms in more specialized economies."

Two other economists, John Wagner of State University of New York and Steven Deller of the University of Wisconsin, wrote in 1998 that it is wise for a region to pursue both economic specialization and diversity.

"Elementary economic theory suggests that growth should be derived from economic specialization based on competitive advantage," they wrote. "Theory also suggests that stability is achieved through diversity by spreading risk (or opportunities) over many activities. Theory, therefore, seems to suggest that regional policymakers are forced to choose between two polar goals of growth and stability, and the corresponding set of policy options … When policymakers attempt to pursue both goals simultaneously, contradictions seem to appear.

"We suggest that the simultaneous pursuit of growth and stability is not contradictory when viewed in terms of the short and long run. Short-run policy can be viewed as more growth oriented where policymakers craft strategies that target growth industries … Diversification policies should be viewed as the long-run envelope of the region's short-run efforts. Long-run policy can be viewed as promoting stability with growth … Diversity is not the absence of specialization, but reflects the presence of multiple specializations."

Achieving economic diversification is no easy task, though. The nonprofit Nevada Development Authority, which attempts to attract new businesses to Southern Nevada, has had a tough time doing so in recent years as the Great Recession has discouraged entrepreneurs from beginning new businesses or expanding existing ones.

In fiscal 2004 the authority assisted 71 new or expanding businesses in the Las Vegas metro area. But that number fell to 26 in fiscal 2010 before edging up to 34 in fiscal 2011. In fiscal 2002 the authority's work contributed to 3,514 new jobs and $153 million in additional wages. In fiscal 2011, though, the authority helped create only 763 new jobs paying $34 million total in wages.

In an advertising campaign launched last year in Southern California, the authority relied on testimonials from the likes of entertainers Wayne Newton and Terry Fator, Zappos CEO Tony Hsieh and UNLV President Neal Smatresk.

"There's a deep misconception about Las Vegas, that it's all about resorts and hotels, great restaurants and having a good time," Somer Hollingsworth, the authority's president and CEO, said after the campaign was launched. "By using successful people from our community we highlight the human side of Las Vegas. Real people are more credible than a fabricated advertising tactic."

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