My dad was a high school math teacher and when I was growing up I knew that if I had a question about my math homework, I should just ask my mom. You see, I wanted to know enough to answer the question at hand but I didn’t want to know EVERYTHING about the topic. So when clients ask what’s our multiplier, a polite economist might say “1.5” and return to his work but…I’m not a polite economist so buckle up for the dad answer.
The Big Idea
Economic developers are all pretty familiar with the concept of an economic impact multiplier – a new business will spend money in the local area and this spending will support not just employees in the new business but spin-off workers in other businesses throughout the area. Multipliers are estimated using an input-output model that seeks to identify how a change in one industry will ripple through the rest of the economy by quantifying the increase in other industries.
Types of Multipliers
There are several types of multipliers but in their simplest form, direct-effect multipliers are values (that might be something like 1.5 or 2.73), which are multiplied by the direct impact in order to determine the total impact, inclusive of spin-off activity. So if a company brought 10 jobs and we knew the employment multiplier was 1.5, you would multiply 10*1.5=15 and so you could see that 15 total jobs were created with 10 direct jobs and 5 spin-off jobs. Sometimes final-demand multipliers are used. Final-demand is more or less just a fancy term for sales or revenues. For example, a final-demand employment multiplier would show how many total jobs are created for each $1.0 million of sales in a particular industry. So with a final-demand employment multiplier of 12.0 and a new business with $4.0 million in sales, we could estimate that about 48 total jobs would be created in the economy. There are multipliers that allow you to estimate all sorts of economic impacts – not just employment. Other multipliers are available to estimate the workers’ earnings, economic output, and value-added.
All of this sounds pretty straightforward so far but remember, multipliers are specific to a region and an industry.
Region of Analysis
For economic developers, you have to be specific about which area you want to consider in an analysis because you only want to consider the area that is relevant to your community. If we think of a furniture manufacturer, it will need some inputs like wood, fabric, and machinery which will all create spin-off jobs. However, if your community is all grasslands and would have to bring in the lumber from the northwest, you wouldn’t want to account for those spin-off jobs for cutting down the trees because those employees won’t be living in your community, paying your local taxes and using the services.
Here’s a quick example – the statewide Texas employment multiplier for furniture manufacturing is 2.73. The Dallas County employment multiplier for furniture manufacturing is 2.05. The multiplier for a smaller region is generally smaller than that of a larger region because the smaller region experiences more “leakage”.
Leakage represents the amount of money that is not or cannot be spent in a particular region’s economy. Continuing the example from above, leakage occurs when money is spent to purchase lumber outside of the community where the furniture manufacturer is located. The more suppliers a manufacturer has in its region, the more money it will spend in the region, reducing leakage, and the larger the economic impact will be.
To sum up, if you are a local economic developer, you don’t care how many jobs a project creates in the State of Texas but you will want to know how many jobs are created inside the City of Dallas.
Multipliers tend to vary not only by region but also by industry. A general rule of thumb is that manufacturing industry multipliers are larger than service industry multipliers for the same region. The statewide Texas the employment multiplier for the furniture industry as mentioned above is 2.73. The statewide Texas employment multiplier for a restaurant is 1.5. Multiplier variation by industry is best explained by economics juju. Without getting too far into the weeds, a restaurant relies on a different mix inputs than a furniture manufacturer. The spending on that mix of inputs supports spin-off impacts and as leakage occurs as money is re-spent back through the supply chain, some industries just support more impacts in the area than others.
|Dallas County||State of Texas|
Source: RIMS II Direct Effect Employment Multiplier – direct, indirect, and induced effects.
You may have caught me using some jargon, so let’s stop and clarify. Spin-off impacts are the economic impacts that are generated as a result of a new business. The direct activities result in spin-off economic impacts that can be categorized as indirect and induced
Indirect: Indirect impacts are simply the supplier impacts. A furniture manufacturer will support indirect impacts in lumber, fabric, and machinery businesses and other backward linked suppliers to these suppliers. Indirect impacts are the result of business-to-business spending.
Induced: Induced impacts are the employee spending impacts. The employees of the furniture manufacturer, lumber yard, fabric business, and so on will spend some of their earnings in the region; supporting retail stores, gas stations, banks, restaurants, service companies, and other businesses supplying goods and services to direct and indirect workers and their families. Induced impacts are the result of employee spending.
So where do I get these multipliers (other than my not-so-polite economist)?
You’ve probably heard of a couple economic impact models like RIMS II and IMPLAN. RIMS II (Regional Input-Output Modeling System) is a model produced by the Bureau of Economic Analysis (BEA) under the U.S. Commerce Department. You can purchase RIMS II multiplier tables for any county, state, or combination of counties. Essentially you get some tables of multiplier relationships and the rest is on you to figure what you’re doing. IMPLAN is a model that is privately owned by THE IMPLAN Group LLC. IMPLAN is a little more sophisticated than RIMS II in a couple ways but you can export multipliers in for any region or area and get your “multiplier” if you so choose. EMSI, another privately owned model, also includes multipliers as a part of its data service.
So next time you’re wondering what your multiplier is, you can see the answer really depends on the industry, the impact region, whether you want to estimate jobs, salaries, economic output, value added, indirect, or indirect and induced impacts…or hey, you could just go with 1.5 and call it a day.