Industry Impacts: Direct, Indirect, and Induced Effects

INTRODUCTION:

So you ran your Industry Event impact and you get to the Results screen. Great!  But have you ever wondered exactly what each of those boxes in your summary results mean? This is the article for you!  

There are nuances with each type of Event you run. This article specifically addresses the  Industry Output, Industry Employment, Industry Employee Compensation, and Industry Proprietor Income Event types.

INTERPRETING THE RESULTS:

Let’s walk through an example.  Andrew’s Bootleg, a craft vodka company, went legit in 2019. We modeled his $1.5M in Output on the state of North Carolina. Our results are as follows:

Now let’s unpack exactly what his sales mean for the North Carolina economy.  We see a total impact of 4.3 jobs, $471,347 in Labor Income, $1.4M in Value Added, and $2.0M in Output. This is the total economic impact from Andrew’s Bootleg; the sum of the Direct, Indirect, and Induced effects. Each of the next sections outlines what each part of this impact actually means.

EMPLOYMENT:

Direct Employment

The 0.95 Direct Employment show that with $1.5M in Direct Output, it looks like Andrew can almost support himself full-time. This figure is the direct number of job years associated with the Output. But remember, jobs in IMPLAN are average annual employment. To switch between IMPLAN jobs and FTE, use the 536 FTE & Employee Compensation Conversion Table (2017). Using this converter, we see that the 0.95 IMPLAN jobs translate to .91 FTE jobs.

Indirect Employment

Andrew has to buy things like corn and yeast for his distilling. Because he is able to purchase some of his inputs from within the state, 1.19 jobs are supported in business-to-business transactions with the corn and yeast (and other) suppliers, as well as suppliers of those suppliers in the state.  This Indirect employment represents the number of job years that are supported by business to business transactions as a result of the economic activity generated by the Event.

Induced Employment

Andrew himself, and the employees in the businesses supported by Andrew's operational purchases, spend a lot of their take-home income in North Carolina on things like paying rent and buying groceries. Through this, 2.16 jobs are supported in industries like real estate, health care and restaurants.  Induced employment represents the number of job years that could potentially be supported by household spending as a result of the economic activity generated by the Event.

LABOR INCOME:

Direct Labor Income

Andrew pays himself well. The $292,512 in Direct Labor Income is the sum of the Employee Compensation (EC) and Proprietor Income (PI) paid to that one (0.95) employee. Even though EC includes wages and salaries, all benefits (e.g., health, retirement), and payroll taxes, he still takes home quite a bit. To switch between IMPLAN Employee Compensation and Wage & Salary figures, we can again use the 536 FTE & Employee Compensation Conversion Table (2017). Using this converter, we estimate that Andrew will take home $236,276 in wages. Direct Labor Income is the initial income earned by the Direct employees of the Industry specified in the Event.

Indirect Labor Income

The $83,289 in Indirect Labor Income is the EC and PI that Andrew’s Bootleg supports in the corn and yeast (and other) suppliers. Indirect Labor Income is the amount of EC and PI that is associated with business-to-business transactions as a result of the economic activity generated by the Event.

Induced Labor Income

Because Andrew and the other supported workers are spending their paychecks around the state, there is an Induced Labor Income of $95,546, including both EC and PI. Induced Labor Income is the amount of EC and PI that is associated with household spending as a result of the economic activity generated by the Event.

VALUE ADDED:

Direct Value Added

Value Added is akin to Gross Domestic Product (GDP) or at the North Carolina level, Gross State Product (GSP). Value Added includes the Labor Income dollars, as well as Taxes on Production and Imports (TOPI) and Other Property Income (OPI). Andrew’s Bootleg contributes $1.0M in Direct Value Added.  Remember, this includes the $292,512 in Labor Income, plus TOPI plus OPI.

Indirect Value Added

Through the business-to-business transactions, the company contributes $131,417 to Value Added or GSP. Again, this includes the $83,289 in Indirect Labor Income plus TOPI plus OPI. This is the specific Value Added that is generated  by business to business transactions as a result of the economic activity generated by the Event.

Induced Value Added

Because of the spending of the employee working at Andrew’s Bootleg and the supply chain companies, $175,477 of Value Added is supported.  This includes the $95,546 of Induced Labor Income, plus TOPI plus OPI. This is the specific Value Added that is generated from household spending as a result of the economic activity generated by the Event.

OUTPUT:

Direct Output

Andrew’s Bootleg has a Direct Output of $1.5M.  We know this because that’s what we modeled. Output is equal to Value Added plus Intermediate Expenditures; it is the total value of production. Remember, it includes Value Added (and Value Added includes Labor Income). Output is also the basis for all other calculations in IMPLAN. Total production value or Output, includes unsold production and excludes sold inventory. If Andrew sells all of his vodka produced this year within the year and only sells vodka produced this year, his $1.5M of Direct Output will be equivalent to his 2019 revenue.  

Indirect Output

Because of the business-to-business transactions resulting from local input purchases by Andrew’s Bootleg, $244,801 in Output is supported. Indirect Output represents all of the Output generated because of the Direct business to business spending. This figure includes the $131,417 in Indirect Value Added; and that Value Added then includes the $83,289 in Indirect Labor Income. 

Induced Output

Finally, $304,130 of Induced Output is supported when the employees working at the distillery and their suppliers (and the suppliers of their suppliers) spend their money throughout the economy. Induced Output is the total value that all industries take in as a result of household spending. This figure includes the $175,477 in Induced Value Added; and that Value Added then includes the $95,546 in Induced Labor Income.

BOOTLEG BREAKDOWN:

And that’s it! You can use this guide to help you understand the individual effects of your IMPLAN analysis.  I’ll drink to that!

Written November 18, 2019