Explaining economic impact

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Economic impact analyses are valuable tools for generating insights into the value a new investment can bring to a region, but what does it really mean for your decision-making or tell you about your economy? Guest blogger Paul Scheuren of Impact DataSource explains the essentials of economic impact and shares his firm's know-how in today's article.

Economic impacts occur anytime money changes hands; from consumer to business or even business to business. The biggest misconception is that there is a single value that represents the mystical concept of economic impact. Economic impact is typically measured using four metrics; (1) employment, (2) household earnings, (3) economic output, and (4) value added.

Employment

Employment (or jobs) is probably the easiest one. Typically, employment impact is reported as a headcount of jobs—not in terms of full-time equivalents. So, employment consists of a count of jobs that include both full-time and part-time workers. In this way, 10 full-time workers and 10 part-time workers would be reported as 20 jobs. Studies may vary in how this is reported, but most models take this headcount approach.

Earnings

Household earnings (or workers’ earnings or labor income) is the total amount of income paid to all workers and owners, including wages and salaries, employer provided benefits, and business owner profits. Some studies might report salaries which, depending on how things were calculated, could be correct too.

Economic Output

Economic output (or gross output or output) is the total dollar amount of all sales made or the value of goods and services created in the activity under analysis. Economic output represents the money spent to purchase all of the inputs to a product as well as the money received when the product is sold. This measure is a duplicative total because the value of inputs are counted multiple times when those products are used in the production of other goods and services. Consider a wood furniture manufacturer who buys raw lumber for $50, cuts, sands and stains the wood to create a chair that sells for $200. Economic output in this example would be $250. If this sounds problematic, and you’d rather focus just on the value added at each step, you’re in luck.

Value Added

Value added is the total dollar amount of only new sales made. Therefore, it is output minus the value of anything that was already sold in the market. In our wood furniture example, value added is $200.

These definitions are useful but often generate some additional questions. The first question is “So do I add all of these up to get the economic impact?” The answer is no, these are four distinct measurements of economic impact. Think about it this way, if I told you that I ran a marathon in 3 hours and 56 minutes, at an average pace of 9 minutes per mile; you wouldn’t add the total race time and average pace together. In that case, we’re using two numbers to describe the result of the race. The same is true for economic impact, we’re simply describing the impact in multiple ways.

Another common question is, “Which number do I tell the newspaper?” Not surprisingly, economic output, being the broadest measure of the goods produced, is a prime candidate and most often “the” economic impact that is reported. As most economic developers and newspaper readers know, $50.0 million is better than $49.0 million. But if we back up, how does someone interpret $50 million in economic output? What does $50 million look like? Speaking on behalf of Impact DataSource and our 23 years of experience, your guess is as good as mine. In essence it means that $50 million dollars changed hands in the economy but it doesn’t describe how it increased the size of the economy. The change in value added can be compared to the size of the economy and therefore provides a more meaningful, though less impressive economic impact to report.

For the typical economic development impact analysis for a new business locating or expanding in a community, employment and household earnings are the most meaningful measures. A new business will generate an impact on economic output and value added but the scale of that impact typically doesn’t warrant the use of economic output or value added. This is to say; these measures won’t provide any meaningful insight to the project. The easier-to-comprehend impacts of employment and household earnings are the most instructive measures to analyze and report.

 

If you are interested in learning more, check out the Impact DataSource blog here.  I also encourage you to see 7 Things your Board Needs to Know About That Cost-Benefit Report

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