We at the Center for Economic and Business Research get asked frequently to prepare economic impact studies.
We inevitably ask ourselves whether the resulting job estimates are useful (should anyone care about the job estimates?) and whether they tend to be accurate. We think the answer to the first question is yes. Part of the reason we get the requests we do is because someone needs to know if the benefits of a given action, including the jobs that might be created, outweigh the costs that might be associated with the action. So what about the estimates — are they accurate?
A key piece of an impact study is the estimate of the ripple effects. For example, if a business in Bellingham adds 10 jobs, the additional activity at that firm will ripple through to other firms. In addition, the income those new workers receive will ripple through the economy as the new workers and their families buy various things. And these ripple effects are often described as multiplier effects. The 10 jobs added at the business might result in five other jobs in the region, and we’d say there was an employment multiplier of 1.5. When we conduct an impact study, we take as given the initial jobs to be added. That is the action driving the impacts we are estimating. So the real question is whether the estimates of the multiplier effects are accurate.
Some estimates aren’t accurate. We’ve seen employment estimates of 12 and 13. Those estimates suggest that adding one job at a particular business will result in 11 or 12 other jobs. We doubt it (which is a polite way of saying, “not a chance”). In the cases of unreasonably high multipliers that we’ve been able to study, we’ve found that the industries tend to be highly capital intensive and no adjustments were made to account for that fact. For example, assumptions about how many new jobs are needed in the public sector for new jobs in one industry may not be valid for another industry. If the wrong assumptions are used in the estimation process, the resulting estimates can be unreasonable.
Even when estimates are reasonable, problems can emerge. We note the employment estimates associated with the proposed Gateway Pacific Terminal facility at Cherry Point. Martin and Associates prepared an estimate several years ago of the potential employment impacts if the facility were to be built. We were part of a group asked to review those estimates… and we thought the multipliers and other numbers they prepared looked reasonable. We’ve been asked recently about impact estimates for other bulk cargo export facilities that are lower, including a study of the proposed Millennium facility in Longview. In particular, we’ve been asked how the estimates for the Cherry Point facility could be valid if they are noticeably higher than what has been estimated for the Longview facility. In short, the answer depends on what has been proposed.
Martin and Associates estimated the impacts of a multi-product bulk cargo export facility. The estimates are valid for the business plan given to Martin and Associates. The lower estimates for the Longview facility are for a more highly automated, coal oriented business plan.
Advocates for a project might use impact estimates based on one business plan. The opponents of a project might be thinking the estimates are unreasonable, with a different business model in mind. For example, supporters of the GPT facility might be talking about a multi-product facility while opponents might be talking about a highly automated coal-oriented facility. Both groups could be focusing on different employment impacts and both groups could be right. Of course, two different facilities can’t be permitted or built. Policy makers need to pay attention to whether or how any business plans might be changing, including whether current market conditions support what was proposed and used to generate the impact estimates.
In the end, we think impact estimates are useful. We’ve also found in our work that the estimates can be accurate. But policymakers need to remember that impact estimates are for a particular event or business plan, at a particular point in time. Some attempt should be made to make sure impact estimates are tied to what is most likely to happen, not just to whatever might be stated in the business plan at one point in time. If anticipated job creation helps justify development permitting, and no scrutiny is put onto the likelihood of what is actually to be built, predictably, the outcome will be an unfortunate distortion of the public decision making process.
This is one in a monthly series about the Whatcom County economy. Research for this column was done under the direction of Hart Hodges and CERB staff. Send questions about Whatcom County’s economy for future columns to firstname.lastname@example.org.
The Center for Economic and Business Research at Western Washington University conducts analysis to help businesses, non-profit and government agencies make informed decisions. For more information online, go to cbe.wwu.edu/cebr.