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Does Economic Development Help the Poor? An IO-Type Model for Local

Labor Market Analysis

Joesph PerskyDanile Felsenstein

Project Support from the W.E. Upjohn Institute for Employment Research

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The State of the Art

• Accurately account for all jobs attributable to project

• Expand direct impact by multiplier

• Relate to cost of project

• Convert jobs to earnings: using census proportions for industry i

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Standard Impact Analysis:An Example BENEFITS AND COSTS: SciSource

0.220.34Cost/Earnings$ 26$ 40Cost/JobBENEFIT MEASURES:

$2,500$ 2,500TOTALCOSTS: (in thousands of 1992 $)

$11,453$ 7,362TOTALEarnings: (in thousands of 1992$)TOTALDIRECT

Overall Economic Impact9762NEW RESIDENT JOBS:

MinusDisplaced Local JobsEndogenous GrowthSuburban Commuters

--100PROJECT JOBS:TOTALDIRECT

Employment

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Example ContinuedDISTRIBUTION OF Employment BY Earnings Group Absolute 1 2 3 4 5

Direct 2 5 21 29 5Total 5 8 31 40 13

Share 1 2 3 4 5Direct 3.4% 8.1% 33.3% 47.3% 7.9%Total 4.7% 8.6% 31.7% 41.7% 13.2%

DISTRIBUTION OF Earnings BY Earnings Group Absolute 1 2 3 4 5

Direct $699 $1,129 $2,891 $2,466 $177Total $1,519 $1,842 $4,266 $3,367 $460

Share 1 2 3 4 5Direct 9.5% 15.3% 39.3% 33.5% 2.4%Total 13.3% 16.1% 37.3% 29.4% 4.0%

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The Problems

• No attention to opportunity costs of labor

• No real attention to welfare effects: are poor doing better than rich?

• No policy guidance: what kind of jobs to promote? High wage or low wage? For locals or commuters?

• No adequate model of local development

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A Chain Model of Local Labor Markets

• Assume unemployment and underemployment – slack in labor market

• A new job, if filled by an employed worker, opens up a chain

• Workers move from job to job to improve their welfare

• New perspective on employment ‘multipliers’

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Horizontal Multipliers

Backward LinkagesSuppliers:30 Indirect Jobs

Light Bulbs Inc.

Forward LinkagesHousehold-serving:20 Induced Jobs

Supermarket Stores

Instrument Plant100 Direct Jobs

SciSource

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‘Horizontal’ Multipliers

InducedIndirect

Direct

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Job Chains and Vertical Multipliers

New Job in SciSourceExisting

Similar Job in OptiSourceExisting

Related Job in InstruSource

In-Migrant to LocalArea Ms. Black

Terminates Chain

Job Changer:Mr. Jones

Job Changer:Ms. Dee

Vacancies

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Job Chains and ‘Vertical’ MultipliersInduced

Chain Termination Job ChainsVacancies

IndirectDirect

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Chain Literature• Housing Market Studies—

– Lansing J.B., Clifton C.W. and Morgan J.N. (1969)– Emmi and Magnusson (1994,1995)

• Organizational Studies —– Parishes: White (1970) – Orchestras: Abbot and Hrycak (1990)

• Hermit Crabs– Chase, Weissburg and DeWitt (1988)

• Labor Market Flows– Schettkat (1996)

• Economic Development– Webster (1979)– Robson, Bradford and Daes (1999) – Persky and Felsenstein (1999)

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The Chain Model and the I-O Model

• Job chains= production chains in I-O

• Production chains estimated by average ‘input vector’ for each industry

• Job chains: estimate ‘input vector’ for each type of new job, by wage group.

• Chain length=size of employment multiplier

• Chains initiated by indirect and induced activity, not just direct.

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Leontief Model of Job Chains

• (Q) : A square job flow matrix (origin-destination)

• qij, elements of Q which show the chance that a job

vacancy of a j-type position is taken by a worker currently in an i-type position.

• Notice that the sum of these elements over i for a given j will be less than one.

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Termination of a Chain

• Unemployed worker (t1j)

• New entrant to the labor force (t2j)

• In migrant (t3j)

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Three Major Outcome Measures

• Multiplier effects

---expected chain lengths

• Efficiency effects

• Distributional Effects

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Chain Lengths

• Mn = 1/(1- qnn)

• Mn-1 = [1/(1- q(n-1)(n-1))] * [ 1 + qn(n-1) Mn ]

• Mn-2 = [1/(1- q(n-2)(n-2)) * ( 1 + q(n-1)(n-2) Mn-1

+ q(n(n-2) Mn )

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Efficiency Effects

Vj = gains to locally employed workers moving up

chains

+ gains to unemployed, out of labor force and in-migrants

Vj = imij [(kqki *(wi-wk ) + hthi *(wi- chi)].

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Opportunity Costs (w/c) for Unemployed, Out of Labor Force

and In-Migrants

Opp.Costs

1: $25.50 - $40.00 75%

2: $16.40 - $25.50 75%

3: $10.50 - $16.40 50%

4: $ 6.70 - $10.50 40%

5: $ 4.25 - $ 6.70 31%

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Distributional Effects

• A Rawlsian measure:

Rj = mnj h thn *(wn – chn)

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Data

• PSID 1987-1993 (heads and spouses only)

• 3500 distinct year-to-year job changes

• 1992 Real average wage gains for job changers

• Data for four regions and five earnings classes

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Flows into Job Vacancies

Destination Job GroupOrigin Job Group 1 2 3 4 51: $25.50 - $40.00 41.1% 0.0% 0.0% 0.0% 0.0%

2: $16.40 - $25.50 25.0% 52.9% 0.0% 0.0% 0.0%3: $10.50 - $16.40 4.8% 22.1% 46.6% 0.0% 0.0%4: $ 6.70 - $10.50 2.2% 1.5% 18.5% 47.3% 0.0%5: $ 4.25 - $ 6.70 0.0% 0.3% 2.4% 13.3% 34.5%Unemployed 2.9% 3.8% 9.7% 15.8% 24.7%Out of Labor Force 4.0% 3.8% 7.5% 13.5% 30.5%In-Migrant 20.1% 15.6% 15.4% 10.0% 10.2%Column Sum 100.0% 100.0% 100.0% 100.0% 100.0%

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Multiplier Effect

Class of New JobCreated Vacancies 1 2 3 4 51: $25.50 - $40.00 1.70 0.00 0.00 0.00 0.002: $16.40 - $25.50 0.90 2.12 0.00 0.00 0.003: $10.50 - $16.40 0.52 0.88 1.87 0.00 0.004: $ 6.70 - $10.50 0.28 0.37 0.66 1.90 0.005: $ 4.25 - $ 6.70 0.08 0.12 0.20 0.39 1.53

Total Job Multiplier 3.48 3.48 2.73 2.28 1.53

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Efficiency Effect

V/W

1: $25.50 - $40.00 0.43

2: $16.40 - $25.50 0.42

3: $10.50 - $16.40 0.56

4: $ 6.70 - $10.50 0.62

5: $ 4.25 - $ 6.70 0.69

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Sensitivity Analysis

1 2 3 4 5

1 Basic Assumptions 0.43 0.42 0.56 0.62 0.69

2 .75 in-migs; .25 all others 0.41 0.39 0.47 0.54 0.62

3 .75 all in-migrants 0.51 0.51 0.57 0.63 0.67

4 .25 all non job-changers 0.74 0.72 0.74 0.74 0.75

Alternative Opportunity Cost Assumptions

Wage Group of Initial New Job

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Distributional Effect

Wage Group of Initial New Job

1 2 3 4 5

V/w 0.43 0.42 0.56 0.62 0.69

Per job

Share to Job Changers 0.52 0.37 0.21 0.10 0

Per initial new job:

Dollars per yr to Lowest-R 397 550 960 1,888 7,202

Dollars per yr to Low 4,654 4,303 6,600 10,582 7,202

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SciSource Example Revisited: JOBS

DISTRIBUTION OF Employment BY Earnings Group

New Jobs 1 2 3 4 5 SUMDirect 2 5 21 29 5 62Total 5 8 31 40 13 97

All Vacancies 1 2 3 4 5Direct 3 12 44 71 24 154Total 8 21 67 100 43 240

Share New Jobs 1 2 3 4 5Direct 3.4% 8.1% 33.3% 47.3% 7.9% 100%Total 4.7% 8.6% 31.7% 41.7% 13.2% 100%

Share Vacancies 1 2 3 4 5Direct 2.2% 8.0% 28.5% 45.8% 15.4% 100%Total 3.5% 8.9% 28.0% 41.7% 17.9% 100%

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SciSource Example Revisited: EARNINGS

DISTRIBUTION OF Earnings BY Earnings Group (in '000 $)Earnings on New Jobs 1 2 3 4 5 SUM

Direct $674 $1,021 $2,741 $2,516 $268 $7,218Total $1,684 $1,633 $4,075 $3,470 $687 $11,558

Welfare Gains 1 2 3 4 5Direct $287 $430 $1,532 $1,566 $184 $3,999Total $718 $688 $2,279 $2,160 $478 $6,320

Share of Earningson New Jobs 1 2 3 4 5

Direct 9.3% 14.1% 38.0% 34.3% 3.7% 100%Total 14.6% 14.1% 35.3% 30.o 6.0% 100%

Share of WelfareGains on Vacancies 1 2 3 4 5

Direct 7.2% 10.8% 38.3% 39.2% 4.6% 100%Total 11.4% 10.9% 36.0% 34.2% 7.6% 100%

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Conclusions

• Chain Effects:

• lengths comparable in magnitude to I-O type multipliers

• longer at the top, shorter at the bottom

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Conclusions (Continued)

• Efficiency Effects :

• net discounting despite volume of vacancies

• V/W = 0.4 – 0.6, higher for low skilled new jobs

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Conclusions (Continued)

• Distribution Effects :

• More people than first estimated are positively affected

• Overall benefits are substantially lower than ‘new earnings’

• ‘Trickle Down’ increases the proportion of benefits going to those starting in the two lowest earnings groups.

• Projects with mid-level jobs may create job chain effects for low-wage. Less so, for high level jobs.