The Stability of Location Quotients

Although location quotients are widely used to analyze local industry specialization and identify industry clusters in regions of all size, past studies have noted issues related to the accuracy of location quotients in small places. This paper examines the stability of location quotients in response to a marginal (i.e., one-unit) increase in the number of business establishments, with a focus on small regions. The analysis considers location quotients calculated for cities and towns in Maine, as well as all U.S. counties, and uses a range of industry classifications (e.g., 1-digit and 3-digit NAICS categories). Results show that the stability of location quotients increases with the population size of regions, but they do not uncover a single, universal population size cutoff for the reliable use of location quotients. Rather, the analysis shows that population size, the level of industry aggregation (e.g., 1-digit versus 3-digit NAICS) and even how the data are collected matter in determining the stability of location quotients.