What are they?
Local economic development policies often aim to attract new employers to an area. New employers, public or private, directly increase local employment (providing they don’t merely displace existing jobs).
They can also have indirect effects on local employment, in the same sector (for example, through agglomeration effects) or other sectors (for example, through increased demand for local goods and services). It is hoped that these effects will be positive leading to ‘employment multipliers’. Less optimistically, however, these positive effects may be offset by increases in local wages and prices.
Policymakers often use estimated multipliers to make the case for economic development spending. Many of these project appraisals predict significant positive multipliers using ‘input-output’ models that focus on the positive demand-side effects adjusted for ‘leakages’ from the local economy (demand that is served by firms from elsewhere). Less frequently, more complicated ‘general equilibrium models’ are used for an appraisal that allows for the possibility of offsetting price and wage effects.
This toolkit takes a very different approach and instead considers the available evidence on the size of the local multipliers that we see in practice. It does not rely on theoretical models and assumptions, instead of letting the data tell us about the balance of offsetting forces and the size of any multipliers.
How big are they?
The available evidence considers multipliers from three kinds of employment – in tradable sectors (that sell mostly outside the local economy); in tradable skilled and high-tech sectors, specifically; and in the public sector. The studies look at impacts from structural change (e.g., the growth of ‘tradable’ sectors like tech) as well as specific policies (e.g., public sector relocation). We found 18 studies that met our evidence standards for toolkits: 17 looking at employment multipliers, 3 of which are for the UK; and one study, from the US, that looks at real wage effects rather than employment.
In addition to evidence on the size of the multiplier effect, some studies also consider whether the new jobs change the structure of the local economy. For example, do increases in public sector employment – which tend to increase demand for local services – shift private sector employment from manufacturing to services. Both the multiplier and the indirect effects on the wider economy are of key interest to policymakers.
We can summarise the findings as follows:
- Additional jobs in the tradable sector tend to increase employment in the non-tradable sector (e.g. local shops and restaurants). The average local multiplier is close to one: for each additional job in the tradable sector, 0.9 jobs are created in the non-tradable sector.
- 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; For tech industries more generally, an additional 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. Two studies report crowding out for manufacturing with effects offset or more than offset by a positive multiplier on services.
Things to consider
- The evidence on local multipliers can help inform more accurate appraisals for projects that create additional jobs.
- 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)
- 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.
- Additional employment may have indirect effects elsewhere in the local economy. 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.