ECONOMIC IMPACT ANALYSIS:AVOIDING SOME COMMON PROBLEMS

David Mulkey and Alan W. Hodges

Food and Resource Economics

University of Florida

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INTRODUCTION

• Impact studies based on input-output models have become more widespread.

• Requested (and sometimes required) by government agencies and a range of private groups.

• Intent is to assess the total impact of a change in some sector or to demonstrate the importance of a particular industry.

• With current software studies are relatively easy and inexpensive to complete, and easier to misuse and/or abuse.

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SOME FLORIDA EXAMPLES

• Rural hospitals in five communities

• Call centers in two rural counties

• State, regional and local impacts of agriculture

• Heritage tourism in St. Johns County

• Removing land from citrus production in SW Florida

• Closing poultry processing plants in NE and NW Florida

• State and local fairs and gambling boats

• Commercial fishing on Florida east coast

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A QUICK OVERVIEW

• Grounded in export base theory: Regional economy drives off sales outside region (direct effects).

• Multiplier effects accumulate as dollars circulate through local service industries (indirect effects), and as new income is spent in local retail and service industries(induced effects).

• Multipliers measure total effect of direct change in sales of any given industry to final demand.

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Rest of the World

Export Firms

Service Firms(Input Suppliers)

Service Firms(Local Population)

Local Population(Households)

Imports(Leakages)

$ G&S

$ G&S

$ Labor

$

Labor

G&S$ G&S $ G&S

$

Good and Services

Lab

or

Ser

vice

s

$

Good and Services

$

Figure 1. Economic Activities of a Community

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Industry Transactions and Social Accounting Matrix

Purchasing Industries Final Demand

Agri-culture

Mining Manu-facturing

Trade Services House-holds

Govern-ment

Exports Total

Selling Industries

Agriculture 12 2 10 6 0 1 1 7 39

Mining 5 2 20 0 0 0 2 11 40

Manufacturing 5 3 6 20 5 9 10 40 98

Trade 2 3 2 1 5 25 10 5 53

Services 7 10 30 2 10 18 10 0 87

Value Added

Indirect Business Taxes

1 2 4 4 7

Household Earnings

5 14 20 12 40

Corporate Profits

1 2 3 4 10

Imports 1 2 3 4 10

Total 39 40 98 53 87 53 33 63 617

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The Implan System• Input-output modeling software licensed by Minnesota

Implan Group, Inc. (www.implan.com).• Regional data available for all US counties and states. • 528 industry sectors, social accounts including 10

household income classes, 4 government sectors, capital investment and inventory change

• Model building and customization features• Impact analysis module, margins and deflators• Reports• http://www.implan.com

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Industry Transactions and Social Accounting Matrix

Purchasing Industries Final Demand

Agri-culture

Mining Manu-facturing

Trade Services House-holds

Govern-ment

Exports Total

Selling Industries

Agriculture 12 2 10 6 0 1 1 7 39

Mining 5 2 20 0 0 0 2 11 40

Manufacturing 5 3 6 20 5 9 10 40 98

Trade 2 3 2 1 5 25 10 5 53

Services 7 10 30 2 10 18 10 0 87

Value Added

Indirect Business Taxes

1 2 4 4 7

Household Earnings

5 14 20 12 40

Corporate Profits

1 2 3 4 10

Imports 1 2 3 4 10

Total 39 40 98 53 87 53 33 63 617

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Case Study Facts• New data processing firm that serves clients nationwide to locate in Lake City,

Florida• Will employ 375 workers with average annual earnings of $18,000, drawn from 8-

county area• Industry average output per employee: $45,000• Employee training expenditures of $500,000 to local firm• Construction expenditures of $1.5 million, 75% to firms within region• Purchase of $750,00 in equipment and furniture from outside region• Output and employment multipliers given in table below

Sector Output ($/$ direct) Employment (jobs/$MM output)

Indirect Induced Direct Indirect Induced

Data processing 0.219 0.183 21.9 3.8 3.4

Job training 0.194 0.223 29.5 3.1 4.1

Construction 0.203 0.138 10.5 3.6 2.6

Office equipment 0.200 0.250 15.0 4.0 4.0

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Case Study Impact Analysis Results

Impact Output ($1,000) Employment (jobs)

Direct Indirect Induced Total Direct Indirect Induced Total

Construction 1,125 220 155 1,500 12 4 3 19

Data processing

16,875 3, 695 3,088 23,658 375 64 57 496

Training 500 97 112 709 15 2 2 19

Office equipment

0 0 0 0 0 0 0 0

Total 18,500 4,012 3,355 25,867 402 70 62 534

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SOME COMMON PROBLEMS

• Defining the region for analysis

• Estimating direct effects

• Failure to margin retail sectors

• Adjusting for differences in regional structure

• Interpretation of results

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DEFINING THE STUDY REGION

• Impact studies usually requested with respect to some particular geographic location, usually a city, county or state.

• Impacts are dependent on the definition of region, and there are usually differences between political jurisdictions and functional economic regions.

• Regional definition should consider location of labor force and support industries.

• In most cases, functional regions are larger than counties.

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MONROE

POLK

WHERE IS GAINESVILLE?

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Pensacola

Tallahassee

Jacksonville

Orlando

Miami, Ft. Lauderdale

Ft. Myers, Coral Gables

Sarasota, Bradenton

Tampa, St. Petersburg, Clearwater

BEA Economic Regions of Florida

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ESTIMATING DIRECT EFFECTS

• Direct effects are not always easy to estimate and require some analysis prior to doing an impact study.

• Impact studies are often requested in cases where no new economic activity is created.

• Input-output models can only measure impacts where some change in output or expenditure takes place.

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RETAIL SECTOR MARGINS

• Impact studies are often requested for events where a large part of the impact takes place through local retail sectors.

• Only the margin can be appropriately allocated to the retail sector. The value of goods sold must be allocated to another producing sector.

• In most rural areas products are not produced locally and must be treated as imports (leakages) from outside the local economy.

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DIFFERENCES IN REGIONAL STRUCTURE

• Software packages like IMPLAN generate local input-output tables by relying on local data (output, employment, and value added) and national input-output tables.

• Technology of production (embodied in the relationship between sectors) is assumed to be the same in the local economy.

• Adjustments are required where local structure differs significantly from national relationships.

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INTERPRETATION OF RESULTS

• An impact analysis is not a benefit-cost analysis.

• An impact analysis is not a measure of net welfare change.

• An impact analysis does not provide insight into longer term structural change in response to external stimuli.