Multiplier
M
by Jenny Thorvaldson
What is a Multiplier?
The multiplier effect refers to the amplified effect of an initial
economic stimulus after all of the secondary or “ripple”
effects have worked their way through the local economy.
The initial stimulus is known as the Direct Effect. There are
two types of secondary effects: Indirect Effects and Induced
Effects. Indirect Effects capture the inter-industry effects only
(i.e. industries buying from local industries). Induced Effects
capture the local spending of Labor Income (after removing
savings and taxes) by local households.
An industry’s multiplier represents the extra economic
activity (whether in terms of output, employment, or valueadded) that is generated in the regional economy for every
unit of economic activity generated by that industry. The size
of an industry’s multiplier effect depends on the amount of
inputs that the industry purchases locally and the amount of
Employee Compensation it pays to local residents. Therefore,
multipliers vary by region, by sector, and by year. Larger
regions like a state generally have larger multipliers than a
smaller region like a county due to the fact that a higher
proportion of inputs and household purchases can be made
from within the state than can be made from within a single
county. However, this is not always the case, especially if a
county is very concentrated in a given sector compared to the
rest of the state or it has a much different wage rate than in
the rest of the state, for example.
Technically, multipliers are unit-less because they are
calculated by dividing the total impact of a given item
by the direct impact of that same item. For example, an
employment multiplier of 4.5 means that for every direct job
in that industry 3.5 additional jobs across various industries
throughout the local economy are required. However, in the
EB-5 setting, jobs per dollar of direct investment (known as
a response coefficient), rather than jobs per direct job, are of
most interest and importance.
Illustrative Example
In the example illustrated here, the initial stimulus is the
operation of a new assisted living facility. The direct impact
generated by the direct investment of $6,000,000 amounts to
134 jobs1. Part of this $6,000,000 investment is set aside as
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profit and another part goes to pay taxes. The leftover amount
($5,000,000) goes to purchasing inputs (goods and service)
and paying wages.
•
Of the input purchases, a certain percentage of them are
from local suppliers, thereby generating additional local
jobs. This represents the first round of the indirect impact.
•
Of the employee wages, a portion goes to pay payroll
taxes. Then, a portion leaves the region as in-commuters
take their wages home with them. Of the remaining
local resident income, a portion is set aside for savings
and another portion goes to pay taxes. Finally, the rest is
spent on goods and services. Of these purchases, a certain
percentage of them are from local suppliers, thereby
generating additional local jobs. This represents the first
round of the induced impact.
•
We see that in the first round of indirect impacts, one of
the input purchases made by the assisted living facility is
from the Real Estate sector. The Real Estate sector now
has to purchase more inputs and pay more wages in order
to meet that new demand, thereby creating additional
local job impacts. This is the second round of indirect
impacts; subsequent rounds follow the same logic. Each
round of impact gets smaller and smaller as money
continues to “leak” in the form of taxes, savings, non-local
purchases, and non-resident workers until the process
stops. All rounds of impacts are summed to arrive at the
total impact. Dividing this total impact by the direct
impact yields the multiplier; thus, a multiplier is the
summary measure of all rounds of secondary impacts per
unit of direct impact.
How is a Multiplier Used?
Continuing with our current example, if we knew the direct employment of 134 and we knew that the employment multiplier
for the Assisted Living Facilities sector in our region is 3.8, we
would simply multiply 134 * 3.8 to get our total employment
impact of 509. If the analyst did not know the direct employment figure but knew the annual revenue ($6,000,000 in the
present case), he or she would multiply the revenue (a.k.a.,
Output) figure by the Employment per $MM Output response
coefficient to get the total job impact estimate.
EB5 INVESTORS MAGAZINE