Clusters and the Great Recession

The depth of the Great Recession and the current COVID-19 crisis have increased the interest in the economic resilience of regions. This paper evaluates the role of clusters in the resilience of regional industry employment to economic downturns. Regions specialized in particular clusters (groups of closely related industries operating within a region) enjoy agglomeration economies that could mitigate the effects of recessions and the resulting increase in uncertainty. However, cluster specialization could also propagate negative shocks among related industries, increasing the impact of recessions. This paper explores these issues over the period of the Great Recession. Using a recently available set of cluster definitions (Delgado, Porter, and Stern, 2016), we examine annual employment growth in region-industries (6-digit NAICS) in the United States from 2003 through 2011. Overall, we find that larger regional industries experienced lower employment growth over the full business cycle, and this convergence effect was greater during the financial crisis. However, those industries located within a stronger cluster (in terms of employment, number of businesses, the presence of buyers and suppliers, and shared labor occupations) or a broader cluster (in terms of the number of specialized industries) experienced relatively higher annual growth from 2003 to 2011, and especially during the crisis. The benefits of location in a strong cluster were greater for supply chain industries (i.e., those that sell primarily to other businesses) than for business-to-consumer industries across the whole business cycle. These findings suggest that the strength and breadth of regional clusters improve the employment resilience of the constituent industries, with inter-firm, inter-industry linkages as a relevant source of resilience in the face of uncertainty. In contrast, large regional industries located in weak clusters were highly vulnerable to the Great Recession.