Source: Political Economy Research Institute (PERI), University of Massachusetts, Amherst
Whether they’re discussing economic activity in Kenner or stimulus spending in Kentwood, policymakers and analysts often reference employment ratios and economic multipliers to support their arguments. The two figures are mentioned interchangeably when discussing job creation, but there are subtle differences between them that we’ll look at in this post.
Direct, Indirect, and Induced Effects
Ratios like “direct jobs per $1 million of government spending” allow us to convert between different measures of economic activity. For example, a state senator presenting a case for a new levee might argue that $10 million project will create 200 construction jobs, equivalent to 20 direct jobs per $1 million budgeted. On the other hand, multipliers measure the indirect (support-industry) and induced (worker consumption) effects of a spending program within a defined region. For example, the multiplier on the levee project would look at new jobs created at construction equipment companies (indirect effects) and how workers on the levee project spent their money at local stores (induced effects). Together, both figures (ratios and multipliers) illustrate the impact of economic stimulus on employment and the local economy.
Source: Michigan State University
Ratios and Multipliers: An Example
The chart above shows estimated multipliers and ratios for tourism-related industries in Michigan in 1996. The second column from the left has jobs to sales ratios for a dozen sectors of the state economy.
It’s important to note that different sectors have different levels of labor intensity. For instance, there were 9.05 direct jobs generated by every $1 million in spending on general manufactured goods in Michigan in 1996. By comparison, there were 22.79 direct jobs for every $1 million in spending at hotels and lodging places. This suggests that the hotel sector, with maids, cooks, concierges, drivers, and dozens of other staff positions, requires more workers per unit of sales than a highly mechanized assembly line.
(In a similar way, wetland restoration projects, involving civil engineers, dredgers, boatmen, landscapers, truckers, and many other professionals, can be highly labor intensive relative to other sectors in Louisiana's economy, but we'll discuss this more later.)
Further to the right, we see sales multipliers that look at the indirect and induced effects of spending on the broader economy. For instance, the statewide multipliers for the food processing sector in 1996 were 1.37 (Type I) and 1.54 (Type II). The Type I sales multiplier is calculated as
Type I sales multiplier = (direct sales + indirect sales) / direct sales,
while the Type II multiplier is calculated as
Type II sales multiplier = (direct sales + indirect sales + induced sales) / direct sales.
If the Type II multiplier for food processing in Michigan in 1996 was 1.54, then for every $1 of direct sales in food processing, there was $0.54 (1.54 – 1) of indirect and induced sales. Using the Type I multiplier (1.37), we can see that there was $0.37 of indirect sales (1.37 – 1) in sectors like preservative manufacturing and trucking. The estimated induced sales from food processing spending would then be equal to the difference of $0.54 – $0.37 = $0.17. This reflects the spending that workers in food processing, preservative manufacturing, and trucking made on clothes, televisions, movies, and other products and services at local companies.
In the third column from the right, we see the total effects job multipliers for the twelve sectors. Returning to the row for general manufacturing, we see that there were about 15.8 jobs for every $1 million in direct spending. Recall that there were 9.05 direct jobs in general manufacturing for every $1 million in sales, so the estimated number of secondary jobs from manufacturing spending is 15.8 – 9.05 = 6.75 jobs. These jobs are either in sectors that support general manufacturing, creating indirect employment, or industries in which manufacturing workers and support-sector employees spend part of their salaries, creating induced employment.
We could then say that the Type II employment multiplier, defined as
Type II employment multiplier = (direct + indirect + induced employment) / direct employment
would be 15.8/9.05 ≈ 1.75. This means that in Michigan in 1996, every direct job in general manufacturing created about 0.75 (1.75 – 1) indirect and induced jobs in the Great Lakes State.
What Benchmarks Are Used for Economic Ratios and Multipliers?
The Bureau of Economic Analysis generates multipliers and ratios for different sectors of the economy through its Regional Input-Output Modeling System, more often called RIMS II. These are used as a benchmark for economic impact studies in the United States. Researchers also use input/output software like IMPLAN to generate their own spending ratios and multipliers.
There are some estimates of restoration job ratios in the literature (such as in this 2003 paper by the Economic Policy Institute’s Josh Bivens), and we can use these numbers to get a broad picture of the employment that will be generated by wetland regeneration in the Pelican State. In later posts, we’ll look at some of the pitfalls of ratio and multiplier analysis.