A Consumer's Guide to Regional Economic Multipliers

1 SGuidetoRegionalEconomicMultipliersROPON ENTS ofmajorconstructionprojects,suchas astadium)airportorconventioncenter, , ,theclosingof ama-jormanufacturingfacility oralargecutbackinitsproduction isofinterestthroughoutthecommunitybecaus eofitsanticipated ahypothetical,butrealistic,examplediscus sedlaterin thispaper,a $50milliondeclineinaircraftsalesby a tocausea $ , , ,suchnumbersareobtainedusing re-gionaleconomicmultipliers, whichis astan-dardwaytoidentifythepotential effectsof amajorchangeinaregion , ,weprovidean SeeMillerandBlair(1985) theyshould beviewedwithbothcaution s guidebeginsbydiscussingthebasicsofaninpu t-outputmodel;suchamodelidentifiestherel ationshipsamongdifferentsec-torsinan economyand,thus, ,wedescribethestructureofinput-outputmod elsusing two approaches. Inthetext,wepresentanintuitivediscussion ;intheappendix,thediscussionhasmoredetai l, constructinganinput-outputmodel, onebeginsbyseparatingeconomicactivityina region(anygeographicarea,suchasacountry, stateormetropolis)intoanumberofproducing sec-tors.

2 Rhesesectorsmaybehighlyaggregated forexample,manufacturing,services,mining and construction orfairlydisaggregated auto-mobileproduction,hospitals, ,forexample,wouldincludethedollarvalueof thesteelproducedintheregionthatissoldtor egionalautomanufac-turers,aswellasthedol larvalueoftheauto-mobilesproducedinthere gionthataresoldtotheregion ,theautomobileindustry sdemandforsteelisrelatedcloselytothe , ,input-outputmodelsassumethat,foreachind ustryintheregion,thereis $1millionandtheautoindustrypurchased$200 , $2million,theinput-outputmodelthenassume sthattheautoindustry ssteelpurchaseswoulddoubleaswell,inthisc ase,to$400, ,thesemodelsmakenoexplicitassumptionabou ttherelationshipbetweenthevalueoftheoutp utandpurchasesofinputsofgroupsotherthant heregion asfinaldemand becausetheoutputsareleav-ingtheregion ,pur-chasesbyhouseholdsandfirmsfromother regionsand,insomecases, ,thevalueoftotaloutputofeachindustryinth eregionisdividedintothatwhichisusedinthe productionofothergoodsinthesameregion(ca lledinterindustrysales)

3 And ,however,goesbeyonddescribingtheflowsofg oods andservicesbe-tweensectorsand impact analysis isusedtocharacterizesuchastudy,particula rlywhenthechangeisduetoasingleevent ,like achange infederal governmentdemandforaircraft,setsategion seconomyinmotion, relationships causethetotalef-fect toexceed termsofoutput,incomeor employmentgivingrise tooutput, ,forexample,in-dicatesthat,if afirm ssalesin oneregiontobuyersinanotherregion increaseby$100mil-lion,totalsalesthrough outtheregionareex-pectedultimatelytoincr easeby$ $66millioninregionaleconomicactivityisge neratedbecausethe$100millionchangeinspen ding,byaffectingproduction,in-comeandemp loymentintheregion,stimulatesadditional changesinspendingthatcausefur-therchange sinproduction, spending inare-gionaleconomy occursasanapparelmanufac-turerreceivespa ymentforsalestoawholesalerI2 Theregionalmultiplierisanalogoustothesta ndardKeynesianmultiplierusedinmacroecono mics:aninitialin-creaseindemandleads toanevengreaterexpansionofregionalincome ,astheincomereceivedfromthisdemandisspen t, creatingincomeforothers comestoanendwhenthedemandincreaseisoffse tby leakages throughsaving, ,foreverysuchdollarofspendingthatenterst hishypo-theticalregion(columna),40centsi srespentwithin theregion(columnb).

4 Inourexample,thisrespendingincludespayme nts tootherfirmswithintheregionforinputssuch ascloth, dollarisconsidereda leakage ,as it isspent ,taxpayments toalllevelsofgovernmentanddividendsdistr ibuted tostock-holders (columnc), 16centsofthe40centsisrespentwithinthereg ion,while theremain-ing24centsisleakage. Oneexampleoflocalrespendingwouldbepurcha sesofregionally~Agivensector smultiplierissmallerforaregion smultiplierforaspecificsectortendstobesm allerproducedgoodsbythesuppliersoftheapp arelmanufacturerusingthepaymentstheyrece ivefrom continuesuntilanyadditionalspendingwithi nthe byaddingtheinitialdollartothetotalrespen ding within ,thiswouldtotal$ ($1+$ +$ +$ +$ +SOUl).Thus,theapparelsector smultiplierindicates that$ spro-ducers.~Conversely,foreachdollarred uctioninfinaldemand,totalregionalbusines sactivityisexpected todeclineby$ enableresearcherstocalculate fromfirmsin and andClosedModelsInpractice.

5 Householdsascon-sumers andworkers ,theamountthatconsumers spendis afunctionoftheirincomes, sproductiveeconomy,thenincomere-ceivedby householdsisconsideredaleakage, , ,multipliersderivedfromso-called closedmod-els, inwhich regionalhouseholdsareincluded,arelargert hanthosederivedfrom openmod-because,relative tothenation, , taels, sworthoffinaldemandforthatsector thisvalueoftotalbusinessac-tivityislarge r thanthemarketvalueofcurrent-lyproducedgo odsandservicesbecausesomeofthe respendingin ,StevensandLahr(1988)con-clude thatoutputmultipliersarealmost examplemayclarifyhow (MSA)derivedfromonefrequentlyusedinput-o utputsystem,theRegionalInput-OutputModel ingSystem(RIMSII)developed $ ,the$50mil-lionreductionofsalesismultipl ied bythetotaloutputmultiplierforaircraft, ,resultinginatotalchangeof $132million. Thus, by $132millionbecause oftheinitialre-ductioninaircraftproducti on.

6 This total ,thetransporta-tion equipment(exceptmotorvehicles)industry,w hichincludesaircraftproduction, dollarchangeinfinalde-mandforaircraft,ou tputofthetransportationequipmentindustry changesinthesamedirec-tionby$ , ,foreverydollarchangeinfinaldemandforair craft,out-putoftherealestate sectorchangesby$ outputoftheretailtradesectorchangesby$ (industry39)indicatesa$ ,someportionofthe$ , :thosethatindicate regionalincome changesassociatedwithaninitialchangeinou tputand thosethatindicateincomechanges associatedwithaninitialchangeinincome!Th efirstapproachconvertsaninitial$1final-d emandchangeintothetotalchange $1final-demandchangeinaspecificsectorcau seschangesin tothe$1change simple Multipliers , ,othersectors canbeshiftedfromfinal demandtotheregion (1969),forexample,creates Multipliers fortheWashington economythataccount (1986)foradescrip-tion of ,Jefferson, ,Jersey, Madison, ofWashingtonUniversityprovidedvaluableas sistanceontheuseoftheRIMSII modelforthis ,22 IIIIIIIIIIIIIIIIIaI23I~~~~~7t>~~-~,~~ <,~~~/~//~~\/~A ~~y~ //~:-Y~Th_/,,-~<-~\ ~~\1,_N~ ~~,~\_/~/~ ~//~<///\~~/~7-~ ///s~/ /<~/~~__~, ~~//-<~~:~~ ~ ~~~,$/~\//,/,~~</,~//~~ct~A~~>~ ~c4~r/~/~/\~~~p\~//>~/f/-\////~~isJt~~~ -~-J~CLtd9~/~~:7~r~*J~,y)J/-~-~~Aa*al~~ ~,~I~T~//.

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8 C~~M~Sllhirns$r~//~~/1/f S~/r~N~~/~1&*~ O346/\~-~k ~~-~-~~t\\/~:~I~~-~/)~G:jtMt~w/~~~~~//40 L,: S2$I~~N//,t</N\~//~-/_~//////)~//\/~>/ ~i/~////~~~/\N~~~;:i;~f/*oiSsi~~~ ~~~2Z*~~ ~-~I~~ ~1-~ ~:~~Ij~//tr~/U~,~~//tt~an:~,/4 it4fll~*ss~t//7/N/N~NN~N~N~ :~-~~ ~ ar~Nw~tSn4j~Ik&/>~4/~,/>I//*~nSeffS*~fIh ~ho4~ePSS$G~SS ~*~I1S~ ~//~//A/Al/7AN~~I~//~NI~ $1changeinfinaldemandforaspecificsec-tor soutputinitiallybecomesa$ approach,thisdollar replaces thedenominatorwiththeinitialadditional ,itdoesfurnishcloselyrelatedearningsmult ipliersthatcanbeappliedtothecurrentexamp le.(Incomegenerallyincludestransferpayme nts,dividends,interestandrentinadditiont oearnings.)Table1showsthattheearningsmul tiplierfor ,indicatingthatforeach$1changeinoutput from , $ , $ occursinthetransportationequipment(excep tmotorvehicles) $ estimateddeclineinregionalearningsof$ cases,citizensareasinterestedinemploymen tasinoutputorincome,thatis, asector soutputanditsemploymentlevelcanbeesti-ma ted, ,thereareemploymentmultipliersthattransl ateinitialoutputchangesintoregionalemplo ymentchangesand,usingadifferentapproach, employ-mentmultipliersthattranslateiniti alemploy-mentchangesintoregional employment (1988)

9 Note,mostemploy-mentmultipliersareestima tedin termsof jobsrather than full-timeequivalent ,therelationshipbetweenjobsandfull-timee quivalent employeesisnot thesame, ,notonlyareallcomparisons of employmentmultiplierssus-pect,butemploym entmultipliersdonotidentifythemixoffull- and , aircraft sectorof $1millionoffinalsales,shownintable1,isap pliedtothe$50millionreductioninair-craft sales,theestimatedregional employmenteffectwillbealossof1, (exceptmotorvehicles)industryof450(9time s50),therearenoteworthyem-ploymenteffect sinretailtrade(120 jobs)andrestaurantservices(85jobs).Tosum marize,theestimatedeffectsofthehypotheti cal$50million spendingcutforair-craftwouldbe:totalspen ding(output)declinesby $132million;earnings,by$ ;andemployment,by1, ,theseresultssuggestthat,foreachjoblost, regionalearningswillfallby$27,566andtota lspendingby$116, ,thespending declineof$116,814perjobis oflittlepracticalvaluebecausethisfigurei snotthelossin ACCURATEAREREGIONALMULTIPLIERS?

10 MORE REASONSTOBECAUTIOUST hewidespreaduseofinput-outputmultipliers inregionalimpactanalysissuggeststhatmany economists,governmentofficials,firmsando thers ,multiplieranalysishasimportantlimitatio ns ;morearediscussed ; theydonottakeintoaccountaregionaleconomy slong-term , RIMSII model,the$ effects , whileareduc-tion infederalgovernmentpurchasesofaircraftwi llcauseareductioninregionalemployment,at leastsomeofthisreductionwillbetempo-rary asworkerswhosejobswereeliminatedfindnewj obsintheregion. Thus,multipliersmayoverstatethelossofjob s, (1990)stresses estimatesthatall50stateswouldexperiencea tleastasmallreduc-tion ,however,theselosseswouldbemorethanoffse tbythe creationofnewjobs. SupplyConstraintsTheinputcoefficientsmea suringtheinterin-dustryflowsbetweensecto rsare fixed ininput-outputmodels;inotherwords,at anylevelofoutput,anindustry ,this assumptionrequiresthatexcesspro-ductivec apacity ,asufficientsurplusoflaborwithadequatesk ills isalsoassumedtobeavailableatunchangedwag es.