Basics of Economic Impact Analysis
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Basics of Economic Impact Analysis Prepared By: 1 Prepared For: Economic Development Academy Webinar October 2015
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Transcript of Basics of Economic Impact Analysis
1
Basics of Economic Impact Analysis
Prepared By:
Prepared For: Economic Development Academy Webinar October 2015
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1. Economic vs. Fiscal Impact Analysis
2. Why Would You Do One?
3. Key Terms & Mistakes to Avoid
4. How Do You Do One?
5. Impact Models Available for Use
What we are going to tell you.
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Differences Between Economic & Fiscal Impacts
ECONOMIC IMPACT STUDIES• Area: Regional, State or
National Economy• Measures: Changes in Jobs,
Output and Earnings
FISCAL IMPACT STUDIES• Governments: City, County,
Town or School District• Measures: Changes in
Revenues and Expenditures
Not to Mention: Social, Environmental, Cultural & Other Impacts
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• Compare proposed incentive packages and public outlays – is it worth it?
• Help sell a project to a community.• Understand long-term impact on a community and help plan
for a major change (e.g. loss of a major employer). • Fulfill statutory requirements to award incentives.• Use as “mitigation” during an environmental review process.• A version of economic impact studies can be used to identify
economic development opportunities by evaluating the economic base (i.e. which industries drive your economy) and “missing” industries in your region.
Why do an economic impact study?
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Key terms to understand.
Jobs created as a result of a particular project or change in circumstances.
Example: The gain of a major employer.
Tourism is a special case and could have two “direct” effects.
Example: A new casino being built that brings in many visitors.
1. The economic activity at the casino2. All of the visitor spending on lodging, food,
transport, entertainment (other than casino), etc.
Direct Effects
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Business-to-business purchases that occur within the geography causing additional impacts and rounds of spending.
Example: New office occupant purchases maintenance services to clean offices.
Indirect Effects
Key terms to understand.
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Employees spending wages in the geography (e.g. some employees live locally and purchase groceries), causing additional impacts and rounds of spending.
Example: Some employees live locally and purchases groceries from local businesses.
Induced Effects
Key terms to understand.
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Total of direct, indirect and induced impacts.
Economic Impact
Key terms to understand.
This is the ratio between “direct” jobs and “total” jobs. A ratio of 2.5 means one new direct job creates one and a half additional jobs for a total of 2.5.
Multipliers
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“Exogenous Change” - Money is coming in from somewhere outside of your community.
Usually occurs when a community exports a good or service elsewhere (or, for tourism or retail, people bringing outside dollars into your community to spend).
Change in final demand creates jobs in an industry.
Change in Final Demand & “Net New” Jobs
Key terms to understand.
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Change in Final Demand & “Net New” Jobs
Key terms to understand.
$$$
$$$
$$$
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But … did you think about other changes in your economy? Did you think about “net new”?
Key terms to understand.
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“Net New”
• Single biggest pitfall to impact studies is failing to correctly calculate “net new” when thinking about change in final demand.
• “Net new” is the change in final demand once you have eliminated and accounted for all other changes.
Key terms to understand.
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• Will the new guy kill the local guy?How will this effect other employers?
• A new convenience store only serving local demand.
Are we just selling all this stuff to ourselves?
• People do not visit the Grand Canyon because of the new hotel they just built.
Is this new tourism venue going to actually bring in
new visitors?
• $10M in auto sales means $9M goes directly to Michigan and Tokyo. It’s better to use new jobs than new sales to calculate impacts.
How much of this activity is actually done here?
• Avoided job losses can be “net new” if the jobs are truly at risk.
What would happen if this business went away?
Key terms to understand.
“Net New”
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Case Studies: What questions should you ask?
Fun with “Net New”
• Case #2 – Your town’s only hospital is just about to close and build a new facility in the adjacent county.
• Case #3 – A big new Target regional distribution center wants to locate in your industrial park.
• Case #4 – Your local ATV club wants the County to spend $1 million to upgrade trails to promote use.
• Case #1 – A parts manufacturer wants to expand by 10 jobs to serve the local lawn mower assembly plant.
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How to do an impact study.
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1. Do It Yourself• DIY method requires that you purchase software, data or
subscription service (models discussed later) and train staff.• Suitable for larger communities that can devote resources and
who do many analyses each year.
Three ways to actually do an impact study.
2. Academia• Some local colleges and universities can help if they have a
strong economics department.• Must be Lucky and Flexible – Know the right people and avoid
summer and scholastic holidays or be prepared to wait.
3. Consultants• Most appropriate for large high-profile projects that will garner
intense scrutiny.• You get the value of experience and a voice to respond to
criticism.
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Step 1 Select Geography
• Typically a single or multi-county geography is used.
• Can also use MSAs and even ZIP Codes (not all models allow this).
• Think about the project’s logical economic reach.
Step 2Select & Build Your
Impact Model
• Choose what software you will use.
• Purchase data specific to your geography.
Step 3Data Gathering &
Qualitative Analysis• Discuss project with
stakeholders and project sponsor to gather information for basic inputs to model – customize the model based on results.
• May need to adjust for earnings-per-worker or regional purchase coefficients based on trade margins (only applies to certain models).
Steps involved in doing an impact study.
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Step 4Estimate Direct Impacts
• Figure out how initial employment levels will change in the industry affected in your economy.
• For temporary jobs (e.g. construction), express in “job-years”.
• For permanent jobs, use average or final employment count.
Step 5 Apply to Model
• Enter job change in model to appropriate industry sector or sectors
• Run model
Step 6 Report Results or
Refine
Steps involved in doing an impact study.
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RIMS II• Put out by the U.S. Bureau of Economic Analysis• Very cheap!• You get a table of multipliers and the rest is up to you! You
must do all calculations.• Least sophisticated of the “big four” models – uses a
simplified method to arrive at multipliers.• Good for DIY method if only a ballpark estimate is needed.
Economic Impact Models Available
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Economic Impact Models Available
IMPLAN• University of Minnesota developed for the U.S. Forest Service• Perhaps the best known and most common model, used by
many consultants• Must purchase software and datasets separately, must
purchase and update datasets manually each year• Data is significantly better than RIMS II – yet still some
problems• DIY is possible, but requires staff training
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REMI• By far, the most complicated and comprehensive• Good for understanding broad, macroeconomic events or
policy changes• Probably overkill for project-level analysis – extremely
expensive and requires Ph.D. to run and interpret• Uses “Steven’s Technique” - recognized as gold standard,
for multipliers
Economic Impact Models Available
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Economic Impact Models Available
EMSI• Economic Modeling Specialists – also uses Steven’s
Technique• Subscription-based service includes impacts module, can
also include analyses on industry composition, labor force, education programs, GIS, economic base analysis, etc. (Data geeks love it.)
• Can perform analysis at 6-digit NAICS code for geographies as small as ZIP codes.
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Certain industries or situations pose special problems:
• Agricultural industries (production more so than value-added processing) generally do not have good data sets available.
• Low Density Areas - Some industries has so little presence in a region that the underlying information on earnings and output per worker are not reliable; the jobs numbers seem odd.
Data Quality Issues
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Certain industries or situations pose special problems:
• Construction and Capital Intensive Industries – May have output related multipliers that are misleading (must discount based on trade margin). Be very wary when multipliers exceed 4x.
• Cutting Edge Technologies – there may be no appropriate NAICS categories (or other categorization), purchasing is not well understood, impacts are of a second order
Data Quality Issues
