Maryna Ramcharan explains that local economies are dynamic, interconnected systems in which people, jobs, businesses, and technology continuously shape one another. Taking a systems approach to analyse local economies provides deeper insights into what makes them tick.
Analytical projects often focus on specific parts of the economic or social system — a necessary limitation driven by time, capacity, and data availability. However, it’s important to recognise that all economic processes are interconnected. They don’t occur in isolation but rather as part of a larger, evolving system. This system is often complex, with many elements that interact with and influence each other over time. This blog is the first in a series exploring how system dynamics can be used to better understand the local economy at a place level. In this blog, we explore why it’s essential to treat the local economy as a system.
So, why should we treat the local economy as a system? The short answer is because it is one. According to the Oxford Languages Dictionary, a system is: “a set of things working together as parts of a mechanism or an interconnecting network; a complex whole.” Let’s look at what makes up the system we call the “local economy”.
People and demographics
The first and most fundamental element of a local economic system is its people. Populations change over time due to natural processes like ageing, births, deaths, and migration. Beyond these demographic flows, people move in and out of the labour market — becoming economically active or inactive — based on personal and structural factors.
A person’s decision to seek employment is shaped by a wide range of drivers, including household income, education, social networks, the local environment, and family background. These individual decisions, when aggregated, shape the broader economic landscape of a place.
Labour market dynamics
The labour market is another key driver of economic activity. It shapes — and is shaped by — people’s decisions to work, study, upskill, or leave the workforce.
Key factors that influence the labour market include:
- The availability of jobs
- The types of occupations in demand
- The presence of entry-level roles (critical for young people)
- Competition for jobs and the number of job seekers
These dynamics are also influenced by regional, national, and even global trends — adding further complexity to local decision-making.
Businesses and Entrepreneurship
The health of the local business environment plays a major role in shaping economic outcomes. Questions that matter include:
- How many businesses are operating locally?
- How easy is it to start a business, and how long do new ventures survive?
- Are businesses growing and creating jobs?
- What technologies do they use, and what skills are required to work in them?
Business dynamics influence both job creation and the demand for new skills.
Technology and innovation
The pace of technological change, both locally and globally, also affects the structure of the local economy. As new technologies are adopted, some jobs may disappear while others emerge, requiring people to adapt by learning new skills.
It’s important to consider:
- How rapidly technology is developing and being adopted
- Whether this poses risks to existing jobs
- The degree to which the local economy relies on population-driven vs. knowledge-driven employment
Wages, inflation, and living standards
Wages and the cost of living are crucial factors for individuals deciding whether to work and where. Do jobs pay enough to meet basic needs? Is inflation reducing the real value of wages? Are people able to save and plan for the future? These questions shape economic choices and overall well-being.
Interconnections and feedback loops
Every process both influences and is influenced by others. Over time, these interactions generate feedback loops, which can either:
- Reinforce trends (e.g. rising employment driving local spending, which drives further job growth), or
- Balance trends (e.g. rising costs slowing economic activity)
Reinforcing loops can be positive or negative depending on the outcome, while balancing loops help bring the system back to a steady state.
Why does it matter?
When we analyse the local economy, focusing on isolated indicators — like employment rates, business growth, or wage levels — can only tell part of the story. These indicators are shaped by complex, interrelated forces. If we don’t account for how these elements interact over time, we risk drawing incomplete or even misleading conclusions.
Analysing the local economy as a system allows us to:
- Understand root causes rather than just symptoms
- Identify feedback loops that reinforce or dampen change
- Anticipate unintended consequences of policies or interventions
- Build more realistic, forward-looking insights for decision-making
In short, a systems approach helps us move beyond snapshots and toward a dynamic understanding of how places evolve — essential for effective policy, planning, and investment.
In the next blog, we’ll introduce the core ideas behind system dynamics and explore how this approach can help us map and simulate complex, evolving local economies.
This blog was written by Dr Maryna Ramcharan, Policy and Data Analyst at City-REDI, University of Birmingham.
Find out more about the Local Policy Innovation Partnership Hub.
Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of City-REDI or the University of Birmingham.