The diversity of economic activity in a region is often considered an indicator of long-term resilience of the economy. If an economy relies on only a small number of activities to generate it jobs, it is at greater risk of experiencing a large loss of economic activity when one of these activities is disrupted by a shock such as a downturn in demand or a natural hazard such as drought or flood. An economy which depends on a broad range of activities, in contract, is at lower risk of experiencing widespread loss of jobs as a consequence of a shock affecting one of those activities. Economic diversity is typically measured by identifying how much of the economic activity or employment in a region depends on the top employing industries.

Higher economic diversity has been found to increase the choices available to people living in a region, and to be associated with more dispersed power and opportunities for all, although very high diversity can create some difficulty for successful functioning. Overall, however, evidence suggests that higher economic diversity is associated with positive outcomes for human wellbeing in the form of things such as income, job satisfaction, skills and education, and longevity (Hartmann 2018).

Hartmann, D., 2018. Economic complexity and human development: How economic diversification and social networks affect human agency and welfare. Routledge.

Advantages: Economic diversity provides a global indicator of economic performance that is not focused on the idea of growth, but instead on diversity of opportunity and resilience of the local economy to shocks. Some argue this is a better measure of whether the economy is supporting wellbeing than measuring economic growth.

Disadvantages: Sometimes measures of diversity are difficult to easily understand and interpret, and they rely on having access to accurate data about the industries in which jobs and economic activity are occurring in a community. In rural communities, it is common for the local economy to depend on a smaller number of activities than is the case for many urban communities, and there is not a clear threshold for what is the ‘right’ level of economic diversity to support human wellbeing.

This indicator can be measured using a number of datasets. In each case, it is necessary to calculate the proportion of jobs, businesses or economic activity in a region that relies on the top employing industries. This requires considering what industry classification to use, and what is considered to be too small a number of industries.

Understanding industry classifications: In Australia, the Australia-New Zealand Standard Industrial Classification (ANZSIC) is used to classify jobs and businesses into industries. The ANZSIC classifies industries in a hierarchy where every level subdivides economic activities into more specific industries. Agriculture is a useful example. The top level of the ANZSIC classifies economic activity into 19 industry divisions At this level, agriculture is part of the ‘Agriculture, fisheries and forestry’ division. In the next level of the hierarchy, industry subdivisions, Agriculture is considered a subdivision. Different types of agriculture are then further differentiated from each other in the next two more detailed levels of the ANZSIC classification, with activities such as dairy farming, fruit and tree nut growing examined as separate industry groups and industry classes.

When measuring economic diversity, it is important to consider what constitutes true diversity for your community. To do this, consider whether activities would likely all be affected at the same time by the same type of economic shock. For example, in agriculture, economic downturn for beef cattle demand would affect only those involved in beef cattle production but not others. However, drought and floods can impact people engaged in all types of agriculture.

Two sources of data can be used to calculate economic diversity for any local government area in Australia:

• The Australian Bureau of Statistics (ABS) Census of Population and Housing (CPH). CPH data are produced that classify employed people by the industry they work in. It is possible to use this information to calculate what proportion of people are employed in the top 3, 4 or 5 employing industries, using either the ANZSIC industry division, subdivision, group or class they are working in. This information is collected once every five years, and only able to be done by employment, not number of businesses. Data on employment by industry are available via the ABS Tablebuilder product, or Census DataPacks ‘Working Population Profile’.
• The ABS Counts of Australian Businesses, including Entries and Exits data series, updated annually, provides information on the number of businesses by industry division only, for every local government area in Australia; information on employment size and business turnover range are also provide. This enables calculation of the proportion of employment dependent on the top 3 employing industry divisions. To find data for regional LGAs, go to ‘data downloads’ and click on ‘show more’ to ensure the data series containing data by LGA are shown.