Multipliers are the basis of how an I-O Analysis System such as IMPLAN makes estimations of the potential impacts of economic changes. Expressed as a rate of change, a Multiplier describes how for a given change in a particular Industry a resultant change will occur in the overall economy (e.g. for every dollar spent in the economy an additional $0.25 of economic activity is generated locally, implying a Multiplier of 1.25).
This article describes what a Multiplier means, the basis of how we can determine that an additional $0.25 will occur locally, and introduces the idea of aggregating Industries if you are trying to find the impact across a broad spectrum of production rather than a specific Sector.
What a Multiplier Is
Multipliers exist in the IMPLAN Model to describe rates of changes for several different variables. The descriptions below apply to Type SAM and Type I Multipliers, which are unitless values.
- Output - Output is the base Multiplier from which all other Multipliers are derived. The Output Multiplier describes the total Output generated as a result of 1 dollar of Output in the target industry. Thus if an Output Multiplier is 2.25, that means that for every dollar of production in this Industry $2.25 of activity is generated in the local economy: the original dollar and an additional $1.25.
- Employment - Employment Multipliers describe the total jobs generated as a result of 1 job in the target industry. Thus if an Employment Multiplier is 2.33, that means that every Direct Job creates 2.33 jobs in the total economy: the original job and 1.33 additional jobs.
- Labor Income - Labor Income Multipliers describes the dollars of Labor Income generated as a result of one dollar of Labor Income in the target Industry. A Labor Income Multiplier of 2.2 indicates that for every dollar of Direct Labor Income in this Industry another $1.20 of Labor Income is generated in the local economy.
- Value Added - Value Added Multipliers describe the total dollars of Value Added generated as a result of one dollar of Value Added in the target Industry. A Value Added Multiplier of 2.3 indicates that for every dollar of Direct Value Added in this Industry another $1.30 of Value Added is generated in the local economy.
You can also compare Sectors' Multipliers across regions. You will find that Multipliers are generally larger the larger the Study Area is. This is the result of a typical pattern that describes that larger regions will have less leakage to imports. Thus for accurate comparisons, it is most appropriate to compare states to states and counties to counties.
Type I vs. Type SAM Multipliers
Type I and Type SAM Multipliers differ in their definition of "total" impact
- Type I - Looks only at business to business purchases and does not include the effects of local Household spending. This Multiplier is calculated as: (Direct + Indirect Effects) / Direct Effect.
- Since the denominator for the multiplier is always 1.00, the Type I Multiplier will equal the Direct Effect + the Indirect Effect
- Thus, the Type I Multiplier for Employment describes the direct and supply chain jobs within the study region resulting from one direct job.
- Type SAM - Additionally, it includes the impact of Household spending and is the more common Multiplier. This Multiplier is calculated as: (Direct + Indirect + Induced Effects) / Direct Effect.
- For example, the Type SAM Multiplier for Output describes the total output created in the study region resulting from one dollar of direct output.
Effects v.s. Multipliers
When the dollars or jobs associated to all the rounds of local purchasing are summed, the resultant values are the Effects. The Multiplier Effects come in 4 types:
- Direct Effect
- For Output, these effects are either 1.00 or 0.00. For every dollar spent in an Industry, if the Industry exists in the region, there is a dollars worth of activity in the local economy. If the Industry doesn't exist in the region, the effect is 0.00.
- For Employment, the Effect represents the number of jobs per $1,000,000 of production in the Industry.
- Labor Income Effects represent the Labor Income dollars per $1,000,000 of production in the Industry.
- Value Added Effects represent the Total Value Added and various Value Added subset dollars per $1,000,000 of production in the Industry.
- Indirect Effects
- For Output, the Effect represents the sum of local business to business purchases per dollar of Output.
- For Employment, the Effect represents the number of jobs per $1,000,000 of business to business purchases by all resultant rounds of local Industry purchases.
- Labor Income Effect represents the value of Labor Income dollars per $1,000,000 of business to business purchases by all resultant rounds of local Industry purchases.
- Value Added Effect represents the of Value Added dollars per $1,000,000 of business to business purchases by all resultant rounds of local Industry purchases.
- Induced Effects
- For Output, the Effect represents the sum of local Household purchases per dollar of Output, based on Labor Income payments made by the target Industry and the local Industries from which they purchase.
- For Employment, the Effect represents the number of jobs supported in local Industries per $1,000,000 of Direct spending in the target Industry as a result of Household purchases derived from Labor Income payments throughout all rounds of the impact.
- Labor Income Effect represents the value of Labor Income dollars per $1,000,000 of Direct spending in the target Industry in local Industries as a result of Household purchases derived from Labor Income payments throughout all rounds of the impact.
- Value Added Effect represents the Value Added dollars per $1,000,000 of Direct spending in the target Industry in local Industries as a result of Household purchases derived from Labor Income payments throughout all rounds of the impact.
- Total Effects are the sum of the Direct, Indirect, and Induced Effects. For Output, this value is the same as the SAM Multiplier.
- Direct Effect
How Multipliers Are Created
While the complex process of creating the Social Accounting Matrix is not described here, the results of those calculations are a complete transactions table showing what every Industry needs to purchase in order to make its products and the value of every Industry's labor payments (Labor Income), taxes (Taxes on Production & Imports), and profits (Other Property Type Income) and what each Household income group buys.
We also know how much of each commodity is produced locally, which Industries or Institutions produce it in the local economy, and how much of the production is attributed to each producer.
The combination of these two factors allows the software to determine, based on the entered or estimated value of Industry Sales, how much of each commodity will be required to meet the change in production of the target Industry (Gross Absorption) and how much can be obtained from local vendors (Regional Absorption). After multiple rounds of purchases are accomplished and all the spending not attributed to local vendors is lost from the system, the resulting values spent locally on each commodity can be summed to show the total purchasing requirements for that commodity from the local economy in dollars and cents. These results can be viewed in the Detailed Multipliers sheet.
Average Output Multiplier Range
Typically we expect Output Multiplier ranges to follow this general pattern:
- at a county level an Output Multiplier is between 1-2,
- at a state level an Output Multiplier is 2-3 and
- at a national level the expected range is 2-7.
However, individual regions may vary greatly depending on their concentrations of activity. If you have questions on a specific Multiplier in the data for your region, please contact us.
Multiplier specificity is a key to accuracy within an analysis.
The more dissaggregate an Industry specification is the more accurate the results of the analysis will be, as the Multiplier for each Industry reflects:
- the target Industry's specific purchasing pattern,
- its specific relationships for Labor Income / Worker
- its specific relationships for Output per Worker
- its specific relationships for Other Property Type Income / Output and
- its specific relationships for Taxes on Production & Imports / Output
However, there are times when it may be necessary to aggregate Industries together in order to perform an analysis. Please read more about Aggregation Bias and Aggregating Industries if you are unable to attach your dollar value to a specific Industry Sector in IMPLAN.
Unless you have a significant background in using Multipliers in analysis, we highly recommend letting the Analyze functions in IMPLAN do the analysis for you or using the existing multipliers to help you tell your story.
IMPLAN Pro allows you to customize an Industry Sector if you know multiple features of the analysis. As a result of the ability to customize Labor Income factors, the Induced impact is calculated with each analysis run. If you are needing to modify spending patterns or local availability please refer to the Analysis-by-Parts article in Relate Topics articles.
Conversely, if you want to examine the impact of the economy increasing or decreasing by a certain amount, you can aggregate Industries into higher types to allow you to show the impact if it occurs in manufacturing or services rather than in a particular manufacturing or service Sector.
If you are looking to use IMPLAN Multipliers in a different tool, this requires a custom license. We would be happy to work with you to create a license that meets your needs. Please give us a call at 651.439.4421.