A Measure of Economic Diversity: An Input-Output Approach

Economic diversity has often been promoted as a means to achieve the economic goal of stability. Few empirical studies have been able to relate higher levels of diversity to both economic stability and overall levels of economic activity. Diversity measures, as used in these studies, have tended to be narrowly defined, usually emphasizing the distribution of employment across industries. These measures are lacking because they do not capture any elements of endogenous interindustrial linkages. We suggest the conceptual and empirical measures of diversification are at the root of the poor performance of this literature. An alternative approach to measuring diversity based on the technical coefficients matrix of an input-output model is outlined and computed for the 50 US states. Empirical results suggest that higher levels of diversification within the theoretical construct of input-output are associated with higher levels of stability.