Economic Development

How Smaller Cities Hold onto Major Employers

When a city’s economy depends on one employer, leaders will go to great lengths to make them happy. But to survive, towns need to attract new businesses.
by | April 2013
General Motors was the top employer in Janesville, Wis., before its 2,800 remaining positions and 1,225 supplier jobs were cut during the recession. (Photo: AP/Andy Manis)
 

Much like the bulldozers and tractors it builds, Caterpillar’s presence in Peoria, Ill., is big. The company’s corporate headquarters and facilities in the area employ more than 16,000 people, a sizable chunk of the local manufacturing employment base. Requiring a vast supplier network, economic development experts estimate that Caterpillar is the primary customer of 40 percent of local businesses.

But as the company expands globally, many have feared its days in Peoria are numbered. Losing that many jobs would deal a devastating blow to the local economy, one the mid-sized city would find far more difficult to recover from than larger jurisdictions. Fortunately, Caterpillar has signaled that it may stay in Peoria for the long haul, announcing last year initial plans to upgrade its existing headquarters in the city. “For them to announce they’re going to maintain their presence in Peoria, you can’t put a number on that,” says Mayor Jim Ardis. “I can’t think of a [Peoria] business that isn’t touched or impacted by Cat on a daily basis.”

Which is why for Ardis, keeping Caterpillar happy is a top priority. It’s a relationship that the city has fine-tuned over time: Ardis typically meets with Caterpillar CEO Doug Oberhelman quarterly and with the company’s community service representatives almost daily, addressing needs such as workforce development and infrastructure.

It is that relationship that has helped Peoria keep Caterpillar. Texas, Virginia and several other states all aggressively wooed the company, some offering attractive tax incentive packages. “There’s been no shortage of interest from other areas of the country,” says company spokesman Rusty Dunn. Even after the headquarters announcement, the calls kept coming in.

The Peoria metro area is one of the last of its size that has a significant number of jobs tied to a single company. As corporate America has restructured and relocated, few mid-size and smaller cities in the U.S. still boast such a large employer anymore -- let alone a Fortune 50 company.

Some cities in similar positions live in constant fear that the big employer in town could pull up roots and take thousands of jobs with it. As a result, municipal leaders will go to great lengths to keep a major employer happy. Yet they know they also need to diversify, that diversification is a means of economic insurance should the big employer ever leave. But diversification isn’t easy: To the extent that corporations and their facilities are staying in the U.S. (and in some cases coming back from overseas), smaller metro areas face more challenges when it comes to competing. Major metro areas, particularly in the South and West, are a magnet for new businesses and skilled workers. So how can smaller cities hold onto top employers and attract new businesses?

A handful of industries once dominated many U.S. metro areas with populations fewer than 500,000. Michigan’s smaller cities were classically dubbed “auto towns.” Places in the Rust Belt became homes to steel factories, appliance manufacturers and other major industries. In some areas, multiple companies supported a single industry. But nowadays it’s rare for one large company to still support a sizable share of a local economy -- a single employer accounting for more than a quarter of total manufacturing employment is generally considered high. In Peoria, more than half of the region’s manufacturing jobs are Caterpillar employees.

Hospitals also typically top the list of employers in many smaller metro regions, followed by colleges and universities. (In the Peoria area, the OSF Healthcare System employs about 5,000 full-time workers, a distant second to Caterpillar.) School districts and Walmart stores frequently account for large numbers of jobs too.

Major employers with long local histories anchor several smaller cities throughout central Illinois. A short drive from Peoria down Interstate 74, State Farm Insurance’s corporate headquarters in Bloomington employs about 15,000 workers, nearly 20 percent of the area’s private-sector workforce. The area’s next largest employer, Illinois State University, employs 3,563.

Peoria and the Bloomington-Normal area are home to universities and corporate headquarters -- two huge competitive advantages, says George Erickcek, a senior regional analyst at the W.E. Upjohn Institute for Employment Research. Mid-size cities without that double economic benefit often face an uphill battle.

Further south, Decatur, Ill., benefits from the presence of two corporations: a Caterpillar facility making off-road equipment with 4,600 workers, and the world headquarters of food processor Archer Daniels Midland, which employs another 4,000. Neither company made major workforce reductions locally during the recession and both invested hundreds of millions of dollars in modernizing facilities. “When a lot of areas were really tanking economically, we took our hits, but it wasn’t as bad,” says Craig Coil, CEO of the Economic Development Corporation of Decatur & Macon County. “They provided some stability during uncertain times.”

Perhaps college towns best exemplify smaller areas whose economies hinge on one major employer, but schools don’t typically experience the same shifts in employment as cities with industrial-based economies.

Military bases and their contractors also sustain communities. Wright-Patterson Air Force Base, for example, employs about 29,000 military personnel, civilians and contractors near Dayton, Ohio. Redstone Arsenal, an army base in Huntsville, Ala., employs 36,000.

Huntsville Mayor Tommy Battle traveled to Washington in February, lobbying Congress to put a stop to sequestration cuts threatening the army installation. The city, he says, lived through its share of federal budget reductions in the past. “We know that there’ll be a trickle-down effect, so we’ll start early and try to get ahead of potential challenges,” Battle says.

Like other mayors, Battle hopes to support his top employer while also trying to broaden the economy in other areas. “We continually keep our eye on the idea that a diversified economy is the best economy.”

At root of the problem for many towns with a strong manufacturing base is a wage structure that creates an uncompetitive environment for new firms to grow, Erickcek says. Companies are hesitant to set up shop where another employer pays more for the same skills in a thin labor market, fearing they may simply become training grounds for larger businesses.

One significant factor working against the Peorias of the world: Career and cultural opportunities found in major cities often outgun smaller metro areas, says Erickcek. It’s easier to move up the career ladder and provide jobs for two married working professionals in larger metro areas with far more employers. What’s more, smaller metro areas may fail to lure young professionals seeking big-city amenities.

And then there’s global competition. While Caterpillar’s Peoria-area workforce remained relatively flat, its global workforce nearly doubled over the past decade to more than 125,000 last year.

Any smaller metro area relying on a single large employer has to be nervous in the current competitive environment. “All these communities know having all your eggs in one basket is not a good thing,” says Erickcek. Not only do they risk the worst-case scenario of a major employer closing up shop and leaving a sizable hole in the workforce, but accounting, legal and other firms specializing in catering to an industry are also forced to make changes -- or lay off employees -- when a company moves away.

Flint, Mich., the birthplace of General Motors, has seen the company’s workforce dwindle from 80,000 in its heyday to about 7,000 today. The automaker announced the closing of the Grand Blanc Weld Tool Center earlier this year, eliminating another 300 positions. GM was also the top employer in Janesville, Wis., before its 2,800 remaining positions and 1,225 supplier jobs were cut during the recession.

Still, there is evidence that cities like Janesville have a chance, especially if they consider ways to diversify. Many would love to duplicate Silicon Valley’s cluster of tech giants or follow in the footsteps of the Raleigh-Durham area’s Research Triangle, but no set model works everywhere. “All small metro areas would love to find the magic formula where some of them have diversified and done well,” Erickcek says.

Some succeed by shedding industry labels and leveraging their specialties. Toledo is known as the “Glass City” because of its history of auto manufacturing, but it’s no longer just auto glass that’s buoying the Toledo economy. The area supports an increasing number of companies making glass for cellphones and other devices. First Solar Inc., for example, began manufacturing solar panels in Toledo in 2002 and now employs about 1,200 locally.

In nearby Henry County, a Campbell Soup Company plant began producing beverages as sales of canned foods sank and the company’s other facilities laid off workers. Between 2009 and 2010, the area saw exports jump 17 percent, the nation’s third highest increase, according to a Brookings Institution study.

Many mid-size and smaller metro areas strive for economic diversity. For example, while auto manufacturing remains a large part of Toledo’s economy, it’s no longer the focal point it once was -- education and health employment jumped 20 percent since 2000, according to Labor Department data.

While attracting new employers has its obvious advantages, Sally Hanley, director of business development at the Economic Development Council for Central Illinois, says the bulk of the region’s job growth stems from existing businesses, so that’s where she focuses most of her efforts. Many of Caterpillar’s suppliers, for example, expanded their reach to other companies. “They have been able to grow and thrive next to Caterpillar,” Hanley says.

Most companies don’t just suddenly pack up and leave. Instead, they’ll scale back payrolls over several years or start to outsource work, says Joel Cutcher-Gershenfeld, a University of Illinois professor. Some areas may see a dip in wages. But even if a company like Caterpillar leaves, Peoria is large enough that it wouldn’t become a ghost town.

And all signs are that Caterpillar appears to be staying put. Peoria is situated near the company’s other facilities and offers access to a skilled workforce, Caterpillar’s Dunn says. The company’s history in the region -- dating back more than 80 years -- also weighed heavily in its decision. “Peoria has well served Caterpillar, our customers and our employees,” Dunn says. “There’s a significant legacy, and we look forward to continuing it.”

But if you’re a small city mayor relying substantially on one big employer, there will always be some level of anxiety around the economic future, which is why Ardis isn’t ready to break out the champagne just yet. “The fear was always here,” says Ardis. “Until the [Caterpillar expansion] plans are actually approved by their board and the first shovel hits the ground, [that fear is] going to stay here.”

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