Brush up on your Economic Literacy with a Primer on Employment Multipliers

Jenny Mutton

Reports have surfaced showing that the Ontario government just spent another large sum to keep the Medical and Related Sciences (MaRS) partnership afloat. Nationally, the Canadian government is going through with a $15 billion arms sale to Saudi Arabia, despite human rights concerns over its recent execution of 47 people. Inevitably in the defense of these expenditures, a government will say that we must spend money to create jobs, which will in turn make more jobs, which in turn will boost and bolster our economy. They’re preaching the gospel of the employment multiplier. But what seems like a simple concept—jobs create more jobs— is subject to much debate, with multiplier estimates ranging wildly in magnitude (anywhere from nearly non-existent in some industries to a Canada-wide average of 2.78 to a multiplier of 4 for forestry and mining industries). Much has been written about employment multipliers in economic literature, but it’s important for the general public to have enough economic literacy to be wary of politi-speak, because the touted benefits of a grant or project may just be snake oil.

The basics: The multiplier encapsulates three job types: direct, indirect, and induced. Direct jobs are the newly created jobs from, say, a factory opening. There are also indirect ripple effects that can create jobs outside the factory, employing people in supporting and supplying industries. For example, transportation to and from the factory, or a nearby salesman who sells the gloves that workers need to wear, would count as indirect jobs. The uptick in demand for their goods and services is a result of the uptick in direct employment, and therefore it can be reasonably expected that local businesses will boom, necessitating hiring and an increase in indirect jobs.

Induced jobs are weaker ripples that cascade outwards from the original job creation. Now that there are more people employed in the factory, there are new streams of income in the local community. As a local region gets more prosperous, other people find employment in now-booming industries such as food service, recreation, healthcare, and retail. However, this number is much harder to calculate than direct jobs.

How it’s written: The easiest way to calculate the multiplier is to add up the direct, indirect, and induced jobs and divide it by the number of direct jobs. An indirect employment multiplier of 0.25 indicates that for each direct job generated, 0.25 indirect/induced jobs are created. But it can also be written differently: the total multiplier would be written as 1.25, capturing the total effect of job creation; that figure would account for direct, indirect, and induced jobs. Be mindful how multipliers are written, and whether they are counting direct jobs in the multiplier or not. Not investigating this could cause you to double count the effects of job creation. That ‘1.25 multiplier’ looks great until you realize that it takes 4 new factory hires to create just one new indirect job.

Some employment multipliers are written in terms of spending, not job creation. For instance, it would be written in the following way: for every 1 million dollars of spending, x number of jobs are created. A multiplier of 10 here has a very different meaning than a multiplier of 10 in the context of the previous example. Be careful to note whether the input change is spending or job creation.

To make it more complicated, multipliers can vary based on whether the created jobs are skilled/unskilled, the structure and size of the industry, the workers’ salaries, and whether the job produces tradeable or nontradeable goods. Not to mention all the factors that employment multipliers commonly ignore: the upward pressure that increased employment exerts on local wages, the availability of housing for new workers in a given region, the ability of a community to absorb new jobs, and the availability of idle workers who can fill newly created indirect and induced positions.

A million person-years of employment is not a million jobs: Some multipliers are phrased in terms of ‘person-years of employment’ (amount of work completed by an employee in one work-year) rather than ‘jobs created’. Remember Tim Hudak’s Million Jobs Plan that actually not just double-counted but eight-times-over-counted job creation estimates? It’s because he interpreted each person-year of employment over the eight years of the plan to be a permanent job. Something like 30 person-years could be equivalently defined as just one permanent, full-time job—so guess which terminology politicians like to use? This caveat also applies to part-time and full-time jobs: some multiplier estimates weight the two equally, whereas others add up part-time jobs into ‘full-time equivalents,’ which offers a more accurate view of the program’s total impact.

The counterfactual is not null:  When we calculate the multiplier, we are assuming a counterfactual scenario of no new job creation. That is, without the plant opening or the jobs program, there would be no indirect, direct, or induced increases in employment. But keep in mind that in the real world the counterfactual is not ‘nothing’: perhaps instead of a steel plant some other company would have moved in, or in the absence of job grants, the government would put money towards home renovation tax credits. In those cases, counterfactual job creation would have been greater than zero, and perhaps even greater than the multiplier for the policy or program at hand.

Beware the leaky faucet: Employment multipliers are dependent on leakages. The number of new indirect and induced jobs created will depend on how much the newly hired workers will spend and consume in the area. If they are contract workers who are sending money home to their families in another province, then the induced job multiplier will be low because the workers will not demand local goods, which will not create a need for workers to serve them. Leakages can depend on how tightly-knit or isolated a community is. In a small town, any job creation will usually positively affect all other industries. That is why employment multipliers are most useful when analyzing employment effects with a community-centric lens, at the unit of a small region or area.

What the employment multiplier giveth, it also taketh away: Not only do job gains create this rippling effect on the local economy, but job losses result in equal and opposite economic hardship for the whole community. The multiplier is often stated as positive, but remember that it works in reverse. This is apparent in single-industry towns that become eerily empty after a plant or mill closure; without employment income from the mill workers, support industries and services cannot keep their workers employed, and people leave town to find work. While industry representatives and politicians trumpet high multipliers as a point of pride, they should also be a point of caution. A town dependent on a high-multiplier industry will see dire effects if the industry goes south. An obvious cautionary tale is the employment rates of oil/gas dependent towns that have been declining as the price of oil plunges.

So be attentive and be critical when you hear anyone—politician or industry leader—touting the benefits of a job-creating program or project based on the merits of the employment multiplier. Odds are, they have no idea how to employ the phrase.

 

Jenny Mutton is in her second year of the MPP program at the School of Public Policy and Governance. She is interested in public finance, economic policy, and sassy commentary on politics and policy. 

 

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