Economic Models for Impact Assessment Steven R. Miller Senior Research Analyst

2. Economic Models for Impact Assessment Steven R. Miller Senior Research Analyst Center for Economic Analysis Presented to the MI-SBTDC

3. Economic Models for Impact Assessments • An economic model is a simplification of reality • Models are based on mathematical equations that provide a simplified picture of employment and income relationships

4. Economic Models for Impact Assessments, continued • Economic impact models are used to assess the impacts of shocks to the existing economic structure • Shocks take many forms • Increase in export demand for a locally produced good or service • Increase in capital from outside the region (SBA loans and grants) • Changes in federal, state, and local tax codes • New social structures like an arena • Reallocation of resources from one activity to another

5. Economic Models for Impact Assessments, continued • The accuracy of the impact assessment depends on: • The appropriateness of the model assumptions • The accuracy of the shock supplied to the model • The user’s understanding of the model structure in interpreting the results

6. Appropriateness of the Model Assumptions • Consider two models of the labor market using different assumptions about wage rates. • Both models are valid, but the concept of validity is a moving target Wages are assumed fixed Wages are assumed flexible

7. Appropriateness of the Model Assumptions • The fixed wage model produces a greater increase in labor for a given increase in demand • The fixed wage model is most appropriate for • Small shocks to the economy • Economies with high unemployment • The flexible wage model is most appropriate for • Large shocks to the economy • Economies with low unemployment

8. Types of Impact Assessment Models Custom or Off-the-shelf? • Custom models generally • Better represents the local economy • Are extremely expensive to acquire • Off-the-shelf • Standardized structure across all regions • Less expensive to acquire

9. Off-the-shelf Models • All off-the-self models share common characteristics • Use nationally standardized and reported data • Rely on a core Input-Output model to capture relationships across industries • Regional detail for models are generally derived by adjusting national data to fit the local economy • Hence, off-the-self models are fairly comparable.

10. The Input-Output Table • Input-Output table estimates what each industry buys from all other industries within the region to make a dollar’s worth of output. • When one industry increases production, it increases its purchases of inputs from other industries. • Hence a $1 increase in production will generally lead to more than $1 increase in production in all industries

11. The Input-Output Table: Example • Example • Steel industry uses coal to fire its blast furnaces and to mix with iron ore • Coal industry uses steel in its equipment and to brace tunnels • When steel is sold, demand for coal increases • When coal is sold, demand for steel increases

12. The Input-Output Table: Example • Imagine that • $100 of steel requires $10 of coal • $100 of coal requires $5 of steel • Imagine that both industries are found locally • Consider the local impacts if a new customer buys $100 worth of steel

13. The Input-Output Table: Example • Hence a $100 purchase has led to more than $100 worth of local production • The ratio of Total Impact to Direct Impact is known as the multiplier and is always greater than 1 • In our example: • This multiplier is the same if the increase in demand for steel is $100, $200, or $1 million • Simply take the dollar value and multiply it by the multiplier to get the total impact

14. The Input-Output Table, Continued • This example demonstrates the working of the core of all off-the-shelf models • Rather than limiting the relationships to two industries, these models track the local input requirements of all local industries • RIMS, IMPLAN, and EconomicImpact report the full spectrum of federally reported industries • REMI aggregates industries into 169 categories

15. The Input-Output Table, Continued • In a similar fashion household wages and expenditures are recorded. In the steel/coal example, • both the steel and the coal industries hire additional workers to produce the added output • These additional workers spend part of their wages on goods and services provided locally • Benefiting firms will similarly hire additional workers to accommodate the increased demand.

16. Off-the-shelf Models, Continued • Several options exist for off-the-shelf models. • BEA RIMS II (Bureau of Economic Analysis) • Impact and Planning (Minnesota IMPLAN Group) • Policy Insight (REMI, Inc.) • EconomicImpact (EMSI)

17. Back to Off-the-Shelf Models RIMS II • Provides only the Multipliers for 473 industries • Useful in building custom models around the input-output table • Inexpensive (about $225 per district) • Static, making no room for modification of the underlying data • Data is updated every five-years

18. Back to Off-the-Shelf Models IMPLAN Pro. • Provides the modeling environment used to produce the RIMS II multipliers for 509 industries • Dynamic in that it allows the user to provide informed modifications to the underlying data • Inexpensive ($2000 per year) • Data is updated annually • Expands on RIMS to include flows to and from government sectors • STRICTLY DEMAND DRIVEN

19. Back to Off-the-Shelf Models Policy Insight • Expands on the IMPLAN methodology with greater model coverage for 169 industries • Dynamic in that it allows the user to provide informed modifications to the underlying data • Expensive (varies based on number of industry components and geographic area for model) • Relaxes many of the model assumptions fund in IMPLAN • PROVIDES BOTH SUPPLY-SIDE AND DEMAND-SIDE IMPACTS • Provides forecasts

20. Back to Off-the-Shelf Models EconomicImpact EMSI (Limited information on) • This model seems to be built to identify human resource needs (training, occupations, etc.) • Provides the modeling environment used to produce the RIMS II multipliers • Dynamic in that it allows the user to provide informed modifications to the underlying data before calculating the multipliers • Web-based • Provides forecasts

21. Comparison Tableau

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