Productivity, International Trade and Reference Area Interactions in Shift-Share Analysis: Some Operational Notes

These notes discuss and illustrate two new extensions of shift-share analysis: the productivity and output model and the international trade model. We also review a general limitation of these and other shift-share-type models with respect to the interaction between reference area and the region. A possible solution to this limitation is presented. The new extensions provide better insights about the regional economy but that benefit occurs at a cost. The cost is careful consideration and compensation where relatively large regions or sectors are central to the shift-share assessment. The extensions are important in addressing earlier problems with the shift-share approach. Our solution to shift-share limitation on reference area interaction is vital if the method is to be extended to these multiple environments.