The New Republic recently featured an article about Enrico Moretti’s latest book, The New Geography of Jobs. The article discusses the importance of multipliers to regional economies. Here’s an excerpt:
Moretti speaks pretty insistently to those who remain skeptical about the benefits the high-tech, high-pay innovation economy confers on the rest of society. Put simply, he says that not only do innovative industries bring “good jobs” and high salaries to the communities where they cluster but that their impact is “much deeper” than their direct effect.
Here’s a more detailed quote from Moretti’s book itself. (Reader note: A “traded sector” is one that sells to outsiders, bringing in outside money into the region, while a “non-traded sector” is one that serves the residents of the region.)
With only a fraction of the jobs, the innovation sector generates a disproportionate number of additional local jobs and therefore profoundly shapes the local economy. A healthy traded sector benefits the local economy directly, as it generates well-paid jobs, and indirectly as it creates additional jobs in the non-traded sector. What is truly remarkable is that this indirect effect to the local economy is much larger than the direct effect. My research, based on an analysis of 11 million American workers in 320 metropolitan areas, shows that for each new high-tech job in a metropolitan area, five additional local jobs are created outside of high tech in the long run.
[And] it gets even more interesting. These five jobs benefit a diverse set of workers. Two of the jobs created by the multiplier effect are professional jobs — doctors and lawyers —while the other three benefit workers in nonprofessional occupations — waiters and store clerks. Take Apple, for example. It employs 12,000 workers in Cupertino. Through the multiplier effect, however, the company generates more than 60,000 additional service jobs in the entire metropolitan area, of which 36,000 are unskilled and 24,000 are skilled. Incredibly, this means that the main effect of Apple on the region’s employment is on jobs outside of high tech.
We just love this kind of stuff — and it’s the exact same analysis that we (and our users) can easily produce with our IO model. To show you how the model works and to shed more light on the subject, we’ve produced data for two very different MSAs, San Jose and Detroit, that illustrate which industries have the highest jobs multipliers.
Before we get to that, here is some important background information. As many of you know, Analyst, EMSI’s labor market analysis tool, has a built-in input-output model. IO models help us represent the flow of money in an economy, which is primarily between industries. (An industry is a group of business establishments that share similar end-products/services as well as processes for creating those products/services.) Once the money flow is represented in the model, a user can introduce events that change the flow (such as loss or gain of jobs/sales in one industry) and simulate its effects on each industry in the region, as well as the region as a whole.
This complex web of transactions can be arranged according to a particular accounting system called input-output accounts. They are called “input-output” because a portion of the output (i.e., sales) of one industry will appear as the input (i.e., purchases) of other industries. These accounts track the flow of money from one entity to the next, and they give us a sense of the interconnectedness of the industries, households, and government entities that occupy a given geographic space. The accounts also build models to automatically simulate and display these relationships. The input-output model therefore indicates how a change in one part of the economy will ultimately affect other parts based on these purchasing and selling relationships.
How are Multipliers Involved?
As you can imagine, different industries have different impacts. This is due to something we call multipliers. For the purposes of regional IO, a multiplier is a number showing how changes (jobs, earnings, or sales) in one industry will propagate to other industries in a regional economy. For example, a jobs multiplier of 3 means that a change of 100 jobs in that industry would lead to a total change of 300 jobs (3 x 100 = 300) in the whole economy. This 300 includes the original 100 jobs, meaning the additional change is 200.
(Note: We calculate multipliers by dividing total job change by initial job change.)
For this post we will limit our analysis to jobs multipliers. Industries with a high capital/labor ratio typically have high jobs multipliers. A nuclear power plant might have only 20 workers, but each of those workers is associated with millions of dollars’ worth of equipment. Bringing in 20 more nuclear power jobs would flood the region with investment for expanding the plant or building a new one, and it would pile on big bucks in new sales and profits — which means more jobs.
Some of that money would go to the employees’ salaries, some would go to local construction companies, real estate, janitorial services, etc. The overall jobs multiplier would be impressive. Each new job in nuclear power might support 14 other jobs scattered throughout the rest of the economy (i.e., a jobs multiplier of 15). However, attracting 20 jobs in nuclear power with all the necessary infrastructure would be a lot tougher than getting dozens of jobs in an industry with a lower jobs multiplier.
Here we selected ten industries with pretty high job multipliers. These industries are key to the Detroit MSA and help establish the overall base of the economy:[table "424" not found /]
- As you can see, light truck and utility vehicle manufacturing has a huge multiplier for the Detriot MSA. This means that every job in this sector is driving 11 other jobs throughout the economy. The size of this multiplier helps explain why Detroit pays so much attention to the automotive industry and why the MSA has suffered such a beating from the downturn.
- The industry with the most jobs is automobile manufacturing. It currently registers nearly 24,000 jobs and, according to the model, every job in this sector drives over five jobs throughout the rest of the economy.
- Quite a few of the industries with high multipliers — coal/ore wholesalers, asphalt paving mixture/block manufacturing, petroleum lubricating oil and grease manufacturing, etc. — have low levels of employment.
- Seven of the 10 industries on our list are related to manufacturing, so manufacturing is clearly an important jobs creator both in Detroit and nationwide.
San Jose MSA
These are the industries with the highest job multipliers in the San Jose MSA. As you’ll quickly notice, things are very different here:[table "425" not found /]
- Five of the 10 industries are related to the information industry (not manufacturing): software publishers, wireless telecom, wired telecom, internet publishing, and data processing and hosting.
- Only two of the 10 are related to manufacturing: pharmaceutical preparation and semiconductor machinery.
- The multipliers are generally a lot lower than what we saw in Detroit.
- Internet (26,000) and software publishing (14,000) are the largest employers.
- Securities and commodity exchanges have the highest multiplier. In case you’re unfamiliar with this sector, the BLS defines it as “establishments primarily engaged in furnishing physical or electronic marketplaces for the purpose of facilitating the buying and selling of stocks, stock options, bonds, or commodity contracts.”
Now we will use our model to do a quick scenario on software publishers in Silicon Valley.
Using data from 2011, when the industry had 13,400 jobs spread over 167 companies, we see that software publishers were exporting over $13 billion each year. Average industry earnings are astronomically high, which is characteristic of the San Jose area and other places with a steep cost of living. Software publishers are highly concentrated here — nearly seven times greater than the average region. And as you can see, software publishers generate a lot of revenue each year.
Now we will add 1,000 jobs to the economy, which seems like a decent growth rate. The jobs multiplier for software publishers is 4.35, so the addition of 1,000 jobs should have a pretty big impact on the region.
So what happens?
- 4,347 jobs are created. About 1,000 are in the information sector and we see another 800 in the administration industry (NAICS 56). We also see 500 jobs added to the professional, technical, and scientific sector, 300 to accommodation and food services, 250 to health care, 250 to retail trade, 240 to real estate, and so on. See the graphic below.
- The addition of 1,000 jobs also adds a whopping $500 million in new earnings. Not too shabby.
- The average income generated by the addition of 1,000 jobs is over $110,000 per year — a huge positive that just about every other region in the nation would die to see.
Finally, here is a look at the most impacted occupations, which is great if you’re curious about where more hiring could be:
We hope you’ve enjoyed this little experiment. IO is a superb tool for a wide range of development issues, and if you’d like to see what it reveals about your region, let us know.
For more on IO, click here.