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Understanding multipliers

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This blog is the ninth in our series on the key concepts to consider when thinking about local economic growth policies. We’re using the series to test-drive a way of explaining concepts in economic growth that we hope to use in new training and resources. We are keen to hear from readers, particularly those in local and central government, about whether they find these useful and accessible, and if there are other topics you would like to see us cover. 

What are multipliers?

Multipliers capture the idea that a change in spending in one part of the economy can have a knock-on effect on other parts of the economy.

In this blog we focus on employment multipliers – the effect that increasing employment in one part of the local economy can have on employment in other parts of the local economy. This is the multiplier local policymakers will use most often, although they might also be interested in multipliers on other outcomes, such as investment. 

Local employment multipliers occur because increases in employment in one area or sector of activity increase demand for other local goods and services. This increased demand might create additional jobs in the businesses which form part of the supply chain of the activity that has expanded, or in the businesses that provide goods and services to the new employees in that activity.  

Why do we need to think about multipliers?  

When assessing the likely employment impact of interventions, we want to consider both the direct and indirect effects. Adding indirect benefits to economic appraisals can change the benefit cost ratios for submitted bids and may influence which interventions make up a wider strategy.  

To help with this, economists use specific values for multipliers that allow assessment of the size of the indirect effects – that is, the number of indirect jobs that are created for each additional job directly created by an intervention. There are various ways to calculate these multipliers. And, regardless of the method, the evidence suggests that employment multipliers differ across sectors. To reflect this evidence, the Green Book now provides multiplier effects for different sectors. Understanding why these differences occur can also help understand differences in possible benefits from different types of interventions. 

For example, if a local authority wants to change their public procurement spending to support more local jobs, officers can compare the multipliers for different sectors. Changing the supplier for legal contracts, software development, or cleaning of buildings will all create new direct jobs within the successful firms. The size of those direct effects will depend on the size of the contracts. But the multipliers that measure the indirect jobs will differ depending on where those firms buy their inputs, how much they pay their employees and where those employees live and spend their money.  

What to consider when thinking about multipliers? 

When applying a multiplier, carefully consider the factors that will affect the size of the multiplier, including supply chain links, pay and commuting patterns, as well as displacement. For instance, across a larger region, employees who have a new commute may simply change their lunchtime spending or childcare arrangements from one neighbourhood to another. This is displacement – new jobs created in one area at the expense of nearby areas. 

Be cautious with the way in which the multiplier is applied, the magnitude of the benefits claimed and the indirect effects that can be produced elsewhere in the local economy. Remember that some of these indirect effects will go beyond those on employment. For example, additional employment may have indirect effects on raising prices and wages that can offset the employment benefits. Policymakers should take these effects into account when considering the impact on those who may not benefit from the multiplier effect. 

How can I learn more?

Up next 

The next blog in our understanding key concepts in local economic growth series will be on additionality and deadweight. Sign up to our newsletter to get an update on our next blogs, briefings and events.