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What does the evidence tell us about the employment multiplier effect?

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This week we launched a new toolkit looking at local employment multipliers.

New employment in an area can come about through structural change in a local economy, such as the growth of the tech sector, as well as more deliberate actions, like a major new plant or public sector relocation. This new employment doesn’t just create jobs directly. It may also create further jobs in the same industry, for example through clustering, or in other sectors, through increased demand for local goods and services. Local employment multipliers give us an idea of the size of this indirect effect.

Two recent examples highlight the importance of understanding multipliers. There have been extensive debates about the inter-city competition run by Amazon for the site of HQ2 in the US. Claims are made about employment effects in the winning location that go far beyond those jobs directly created by Amazon. Major relocations by public broadcasters in the UK have generated similar debate, with descriptive evidence suggesting that the BBC’s partial relocation to Greater Manchester may have generated substantial additional growth in creative industries jobs and productivity in the city(although not in the wider economy). This raises the question of what Channel 4’s smaller shift of operations to Leeds and other UK cities will do to employment in those local economies.

These examples also illustrate the need to understand the wider welfare effects of new employment in a local area. Most obviously, employment multipliers may be offset by increases in local prices, particularly in local housing markets.

The toolkit looks at available empirical evidence on the size of the local multipliers that we have seen in practice. Our approach does not rely on theoretical models and assumptions, as is often the case, but uses the data from specific examples to tell us about the balance of offsetting forces and the size of any multipliers.

The available evidence considers multipliers from three kinds of employment:

  • tradable sectors: manufacturing or services that sell mostly outside the local economy
  • tradable skilled and high-tech sectors; and
  • the public sector.

The studies look at impacts from structural change (the growth of tradable sectors like tech) as well as specific policies (such as public sector relocation).

We found 18 studies that met our evidence standards for toolkits.

What does the evidence tell us? Our four main findings are as follows:

  • Additional jobs in the tradable sector tend to increase employment in the non-tradable sector (such as local shops and restaurants). The average local multiplier is close to one.
  • The impact of additional jobs in the tradable sector on other tradable jobs is smaller: an additional job in the tradable sector creates, on average, 0.4 jobs in other parts of the tradable sector.
  • Skilled jobs or jobs in high-tech industries generate larger multipliers: an additional high skilled job creates an average of 2.5 jobs in the non-tradable sector; an additional tech sector job creates, on average, 1.9 jobs in the non-tradable sector.
  • Growth in public sector employment has smaller multiplier effects on private sector employment: each additional job in the public sector creates, on average, 0.25 jobs in the private sector.

I’d flag three other points for policymakers to think about.

First, a word of caution. These jobs are new to the local economy, but they are not necessarily new jobs. This employment may simply be displaced from elsewhere (for example, from the area that used to house the government office).

Second, jobs for high-skilled workers, those with degrees or above, appear to create the highest multipliers. High tech jobs also create higher multipliers, although that may be because many of these jobs are high-skilled rather than reflecting some specific feature of tech industry. More work is needed to disentangle these effects.

Third, other effects may matter. The study looking at real wages finds that growing tech employment in US cities also raises housing and other living costs. While more work is needed on the size of the effects, policymakers should take these effects into account when considering the impact on poorer families who may not benefit from increased employment. Concern about these effects was a major factor in the protest against Amazon’s plans for a NY HQ.

We’re currently doing more work to compare these estimated multipliers to those that have traditionally been used in appraisals. We’ll report on the outcome of that work in the near future so watch this space.