Chicago's Financial Industries

By Kaglic, Richard E.; Testa, William A. | Chicago Fed Letter, November 1995 | Go to article overview

Chicago's Financial Industries


Kaglic, Richard E., Testa, William A., Chicago Fed Letter


Since the middle of the last century, the Chicago area has served as the business capital of the mid-continent. Chicago's preeminence covers finance, retail trade, wholesale trade, business services, and manufacturing. Like almost every other major U.S. city, Chicago has seen its manufacturing base erode sharply over the last 40 years. For this reason, the Chicago area looks eagerly to other business sectors to replace lost jobs and income. This Chicago Fed Letter examines the concentration and growth of Chicago's so-called FIRE industries--finance, insurance, and real estate.

FIRE spreads in Chicago

The Chicago area's rate of economic growth has been diminished by industrial upheavals. Since 1969, the area has lost over 372,000 manufacturing jobs, a decrease of 37%. Fortunately, the area is having some success in reinventing itself. Over the past 25 years, service industries rather than manufacturing have stepped up to shoulder the burden of the area's job growth, with FIRE industries showing the most dramatic growth. In 1969, the FIRE sector accounted for only 7% of employment. By 1992, it had created over 190,000 new jobs and accounted for almost one in ten Chicago-area jobs. FIRE employment in the nation also grew rapidly over this period, but by 1992 its share of total U.S. employment had not yet reached 8%. As a result of FIRE's growing concentration in the Chicago area, the sector's performance in coming years will help determine the region's growth and welfare.

FIRE industries

Industries within the FIRE grouping are alike in that they are all financial intermediaries. Banks and securities brokers and underwriters gather capital (savings) from firms and households and transform it into the stock of capital used for business investment, household real asset acquisition, and consumption. By contrast, the insurance and real estate industries provide service outputs other than capital provision or returns from savings. Many real estate operations provide sales services on both business and residential property, while insurance firms add value by pooling and minimizing household and business risk. The futures exchanges, found under the finance industry banner, also deal in the market for risk, albeit in a different fashion. Futures exchanges create a market for risk, serving those who want to shed it and those who want to acquire it.

Some researchers have grouped the FIRE industries along with the so-called business services such as accounting, data processing, and computer services whose primary customers are firms rather than households. However, to a greater degree, FIRE activities include transactions with both businesses a households. Approximately 50% of the output of the finance and insurance industries is absorbed into further business production. By contrast, about two-thirds of real estate output is absorbed by the consumer sector through its sales services for residential properties. Nevertheless, grouping FIRE industries with business services may be sensible because they do tend to share another important feature: Many FIRE services do not require face-to-face delivery to the customer. Because capital is increasingly mobile, financial products are more frequently documented, bundled, and sold afar rather than locally. As a consequence, communities view FIRE industries as possible economic development targets, that is, as industries that can grow more rapidly than the community's own population through the growth of external demand.

Occupation and employment

Because FIRE industries produce a wide range of products and services, they must employ two broad categories of workers: 1) business and finance professional personnel, and 2) administrative, clerical, and data entry personnel. Workers in these two categories need not operate at the same site for any individual firm or any particular industry sector. The highly skilled positions are typically located in large financial centers such as Chicago, London, and New York, where face-to-face communications with others in similar occupations and access to specialty services facilitate product development and sales. …

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