Marilyn Cannon, Regional Economist

Utah is consistently recognized as having one of the strongest economies in the nation. One of the state’s strengths is its highly diverse industrial base. Economies that have a diversified mix of industries tend to enjoy higher employment growth, greater economic stability, and increased resilience. This article explores why economic diversification matters, its relationship with employment and resilience, and how it differs between urban and rural areas in the state.

The Hachman Index

The Hachman Index was developed by Frank Hachman, an economist at the University of Utah, to measure industrial diversification in a regional economy. The Hachman Index compares the industrial mix of a regional economy to that of a well diversified larger economy, rendering a diversification score ranging from 0 to 100. Higher Hachman

 Index values indicate that the regional economy has industry employment shares closely resembling those of the reference region, indicating higher diversification. Lower index values, in contrast, mean that employment in the regional economy has a substantially different industry mix than the reference

region, interpreted as lower diversification. For specific details on calculating the Hachman Index, see the Appendix at the conclusion of this article.

Regional economies that have particularly high employment concentration in dominant sectors—such as mining or leisure and hospitality—tend to have the lowest Hachman Index scores and are considered less diverse. While it makes sense for local economies to invest in industrial sectors in which they have a comparative advantage, this tendency toward concentration is penalized in the Hachman Index calculation. This is a limitation of the Hachman Index metric, as areas with low scores are not necessarily destined for economic hard times; they may, however, be more vulnerable to industry-specific fluctuation than areas with higher diversification.

Why is diversification important?

More diversified economies tend to experience higher employment growth over time and are more resilient in the event of economic downturns. When one industry suffers, other industries in the economy are able to offset the negative impact. On the other hand, in an economy heavily dependent on one or two industries, an economic shock affecting those specific industries makes it more difficult for the economy, as a whole, to recover. Similar to a well diversified portfolio of stocks and bonds, a diversified economy tends to experience less volatility and more consistent growth over time.

Looking at the Hachman Index scores for each state shows Utah has a well diversified economy, consistently ranking in the top 10 states in terms of diversification. This means that Utah has industry shares similar to the US as a whole. The high level of diversification in Utah is considered a factor in the strong growth and economic performance Utah has experienced.

State Hachman Index Scores

Source: The University of Utah's Kem C. Gardner  Policy Institute, U.S. Bureau of Economic Analysis

Regional Hachman Index scores

By digging deeper into the data, a picture of how diversification affects local economies begins to appear. When the Hachman Index is calculated by county and region within Utah, the most urban areas stand out as having the greatest levels of diversification. Intuitively, this makes sense, as areas with more people have a wider variety of employment opportunities.

Smaller counties on the periphery of very urban, diverse counties also benefit from the larger employment base in their vicinity and tend to have higher scores of industrial diversification. This can be observed when looking at regional Hachman Index scores, which show that overall diversification in regions with an urban population base is higher than regions that are entirely rural.

   County Hachman Index Scores


   Regional Hachman Index Scores

Source: Bureau of Labor Statistics, The University of Utah’s Kem C. Gardner Policy Institute

Connectivity

Economic ties and connectivity between adjacent regions play an important role in increasing diversification, especially in rural areas. Employment is calculated based on the location of the job. This means workers who are employed in an urban area but commute from a rural county (including virtual commuting) do not affect the Hachman Index score of the rural county. This could mean that a rural county benefits from workers who are employed in urban areas, in industries unavailable to them elsewhere, even though that increase in diversification is not shown in the county’s Hachman Index score.

The connectivity between the local and regional economies in Utah benefits both urban and rural counties. Commuting and working remotely supplies labor to urban areas with a higher demand for employees than is met by the local population. This connectivity also expands the variety of jobs available to individuals in rural areas, helping to insulate the region from economic shocks that may occur in local industries.

A great example of the benefits of connectivity is shown above in the Southeast region of the state. The two counties in the Southeast region, Grand and San Juan, are more specialized economies, with relatively low Hachman Index scores. However, when calculating the diversification of the region, the regional Hachman Index score is higher than either of the component county scores. This indicates that the two counties are specialized in different industries, and because of the strong connections within the region have more stability because they are more diverse together.

Resilience

Economic diversification is often touted as leading to more resilient economies, which are better equipped to recover quickly from economic downturns and recessions. By looking at how employment has changed in Utah, in the quarters leading up to and following a recession, one can see how long it took for employment to return to its pre-recession level. Comparison on a more regional level is also beneficial in comparing the resilience of local economies.

State Employment

Source: Bureau of Labor Statistics

By splitting the state into two general regions, rural and urban, resiliency between the two can be compared. Urban is determined here by whether or not a given county is in a Metropolitan Statistical Area (MSA). An MSA is a Census designated county or group of counties with a high population density at its core and close economic ties throughout the region. Some counties included in MSAs may be small but have a significant portion of their workforce commuting into a larger county nearby.

One example of a rural county included in an MSA is Morgan County. As a relatively small county that is a part of the Ogden MSA, a significant number of people in Morgan County are employed in Davis and Weber Counties. Because counties within an MSA are economically interconnected, rural counties on the periphery of their larger, urban counterparts recover more quickly from economic downturns.



Source: Bureau of Labor Statistics

In Utah, employment in urban (MSA) regions recovered more quickly from the 2008-2009 recession than rural (non-MSA) regions, returning to pre-recession levels in roughly four years. It was eight years before the rural regions of Utah reached the same level of employment that they had before the recession. This faster recovery in urban regions highlights the relationship of economic diversification and resilience. Because urban regions have a broader mix of industries, they are less dependent on any single sector, allowing job losses in one industry to be offset by growth in others.

Utah recovered very quickly from the 2020 recession, with both urban and rural regions returning to pre-recession employment levels in roughly a year and a half. The fast recovery in rural areas can be at least partially attributed to the influx of people moving from urban areas of the state into rural areas in the aftermath of the COVID pandemic. From 2020 to 2021, rural Utah’s population grew 2.3%, the fastest rate of growth in over 10 years, increasing the connectivity between rural and urban Utah and leading to fast employment growth in rural counties, with a 17% increase in employment since the beginning of 2021.

Relationship with employment growth

More diversified economies are not only correlated with resiliency and less susceptible to dramatic swings in employment, they are also associated with higher job growth rates in the long run. In the chart below, the relationship between Hachman Index scores for a county or region is compared to their rate of job growth over the past 14 years. In Utah, the most diversified regional economies have seen strong long-term growth in their employment bases, while less diversified economies have had slower, or even declining growth over the same period. Statistical analysis supports this trend—the correlation coefficient between economic diversification (as measured by the Hachman Index) and job growth is 0.53 at the county level and 0.59 at the regional level. This suggests that while diversification does not guarantee or cause growth, it is strongly associated with better long-term employment outcomes.

   County Industrial Diversification vs Job Growth Rates, 2010-2024

    Regional Industrial Diversification vs Job Growth Rates, 2010-2024

Source: Bureau of Labor Statistics

Conclusions

Utah’s economy stands out for its high level of industrial diversification, as shown by the Hachman Index, and enjoys the benefits associated with that diversification. Utah has a resilient economy that recovers quickly from economic downturns and experiences strong and steady job growth over time. The urban regions of the state have the highest rates of diversification and are, on average, more resilient and faster growing than rural regions. However, the rural areas nearby benefit from their close connections to more diversified economies, and have also experienced strong growth in employment. Overall, Utah’s industrial diversification has fueled growth and encouraged stability in its economy, making it a model for sustainable economic development.

Appendix

The equation to calculate the Hachman Index is:

,

where is the share of employment for industry i in the subject region and is the share of employment for industry i is the reference region¹, in this case the United States. Index scores for this article were calculated using regional and national employment shares in 11 different industry supersectors.

¹The Hachman Index can also be calculated by comparing GDP share by industry between the subject and reference regions.