Friday, August 23, 2013

Economic Multipliers and You

By Evan D. Robertson, Project Associate.

If you’ve paid attention to local development news – in any capacity in any community for any length of time – odds are you’ve encountered an impact analysis. Generally, these economic impact analyses extoll the benefits – denoted as jobs – of a particular (usually large) development project. These analyses are often presented in support of building publicly financed sports stadiums, and the impact is almost always an unwieldy, positive number. But just as these analyses can make an argument for why a certain city should raise funds to build a particular development project, so too can they make a case for focusing economic development energy in a targeted sector. Combined with a thorough target analysis – one that considers employment growth, local competitive advantages, workforce capacity, and research and development capability along with a host of public input, impact analyses further the case for selecting a target sector and provide insights into the policy interventions needed for growth. At the core of the impact assessment is the economic multiplier.
In essence, a multiplier captures the total impact of adding one job in a given economic sector throughout the economy. For instance, a worker in the Irradiation Apparatus Manufacturing sector (NAICS 334517) will not only spend his or her earnings in the local economy – thereby supporting grocers, department stores, and other personal service workers – but also support increased economic activity within the apparatus manufacturing sector and its suppliers. The resulting impact of this worker spreads throughout the economy. The multiplier captures these inter-relationships in three parts: direct (intra-industry employment gains), indirect (inter-industry employment gains), and induced (the “ripple” effect created when the employee spends his or her money in the local economy. Dividing into these three component parts assists in determining where job growth is likely to occur. A high induced multiplier would create more service jobs, while a high indirect multiplier indicates that a sector is resource intensive and growth will create a need for more production inputs.
As an example, I give you Milwaukee’s brewery sector. The table below divides the total multiplier into its component parts and denotes the total impact of one job added within the local brewery sector. In total, one job added to Milwaukee’s brewery sector will add 3.64 employees – 4.64 if you count the initial job. Induced jobs (personal services) stand to gain the most from this added employment while direct and indirect jobs account for a far smaller portion. Targeting this sector may make sense if the goal is to increase service employment – making bartenders throughout the region extremely happy, free drinks abound. If the goal is to improve business for local supplier firms, expanding employment in the region’s brewery sector makes less sense. Combined with local knowledge and a full analysis of employment and occupational data, you could begin to make a case for targeting breweries in the Milwaukee area as well as prioritizing economic development policy decisions to support the sector.
Milwaukee’s Brewery Multiplier Effect 

Source: EMSI 

To summarize: creating jobs leads to more jobs. And with this knowledge, it might seem like a well-founded idea to just focus on those sectors with the highest multipliers – economic development made simple. Right?
Well, not at all, actually. In Milwaukee’s case, targeting the ten sectors with the highest employment multipliers will yield this
Milwaukee’s Top 10 Multiplier Sectors

Source: EMSI

The results are less than appealing, the fallacy of maximizing the multiplier. As you’ll note, the majority of the sectors either pay high wages (lessor of nonfinancial intangible assets and securities and commodities exchanges) or require significant raw material inputs (gold ore mining, fossil fuel electric power generation, and petroleum lubricating oil and grease manufacturing). Their high multipliers are more indicative of the nature of their business rather than any sort of local competitive advantage. As you can see in the graphic above, employment across these sectors are in long-term decline. Multipliers work both ways: removing one job from a sector ripples throughout the economy causing job losses at suppliers and service businesses alike. The larger the multiplier, the larger the decline. These aren’t always the sectors you’re looking for.
Multipliers strengthen the case for targets. In some cases, they assist in prioritizing investments to ensure that those sectors with the biggest impact get an economic development organization’s increasingly limited funds. Multipliers, however, shouldn’t factor into the initial selection. For that, an extensive examination of employment, workforce capacity, education institutions, and, most importantly, stakeholder input is required to get the right mix of sectors that the local economy is particularly competitive. Once you have that mix, multipliers serve to enhance the case.