Structural Change in the Washington State Economy: Evidence from Seven Input-Output Models William B. Beyers Department of Geography University of Washington Ta-Win Lin Office of Financial Management State of Washington Seattle Economics Council May 12, 2010

Outline of Presentation I.Introduction & Background II.Data Base – History of the Washington Models & Standardization Procedures Results A. Change in Output B. Change in Interindustry Structure, in the induced effects linkage system, and output distribution due to final demand C. Change in Employment Requirements D. Changing Components of Final Demand E. Decomposition of sources of Output Change IV.Concluding Comments

Regional Input-Output Models Total Sales = Total Purchases Total Sales = Intermediate Sales + Final Sales Total Purchases = Intermediate Purchases + Value Added + Imports Final Demand

Impact Analysis Using I/O Models = Output Direct, Indirect & Induced Requirements Matrix X Final Demand Employment Impacts calculated from Output Impacts

Background on Structural Change Leontief and Carter’s pioneering research Early national tests Early regional tests –The presumption of instability –Early data from Washington State – Conway, Beyers –Early data from other regions –Challenges—getting data into a consistent sectoring scheme with constant prices

II. History of the Washington I/O models Models benchmarked against 1963, 1967, 1972, 1982, 1987, 1997, and 2002 Each of these are Economic Census years Sectoring scheme has changed not only due to changes in SIC and NAICS, but also due to changes in the importance of industries in the state economy, especially the changing relative importance of goods versus services production

Standardizing Prices The models were first converted to a common sectoring scheme Price indices were developed from BLS national producer price series, and were applied to sales distributions of sectors Excluded from this are estimates for value added and imports, but we will make these estimates soon The roughly 50 sectors in each of the models were found to be comparable at the level of 25 sectors.

Sectoring Scheme

III. Analyses of Change A. Change in Output B. Change in Interindustry Structure, in the induced effects linkage system, and output distribution due to final demand C. Change in Employment Requirements D. Changing Components of Final Demand E. Decompositions of sources of change

Trends in Output In Broad Sectors

Shares of Output By Broad Sector

Change in Output by Aggregate Sector 1963 – 2002

Change in Interindustry Structure and Output Distribution due to Final Demand

Share of Intermediate Sales by Broad Sector

Elements of the Induced Matrix $ from 2002 model 0 Earnings $127.3 billion 32% of total purchases Interindustry Transactions $95.1 billion 24% of total purchases P.C.E. Regional Purchases $102.9 Billion 67% of Total earnings

Shares of Intermediate and Personal Consumption Expenditures $1972 Billions

Composition of Inputs

Mix of Overall PCE

Composition of Personal Consumption Expenditures – Goods Share of total declined from 21% in 1963 to 6% in 2002

PCE except Services, Trade, FIRE, and Communications

Induced Effects Output Multipliers

Correlations Over Time Industrial Output Multipliers N=26 for each pair of correlations All are significant at the.01 level Correlations weaken with time Similar results for earnings multipliers

Scattergram of 1963 & 2002 Type II Output Multipliers R 2 =.57

Output with constant 2002 Final demand

Change in Employment Requirements

Jobs Required to Meet 2002 Final Demands and Output Per Job

Employment Related To 2002 Final Demand

Share of Output Among Major Categories of Demand Tables 6 and 7- Sales in Constant $, and Percentages in this figure

Share of Regional Final Demand

Composition of Regional Final Demand by Aggregate Sector

Share of Export Base

Sectoral Composition of Exports

Decomposition Data & Method The 7 Washington i/o models in constant $1972, with 25 sectors of detail Use of Miller & Blair’s decomposition equations Explaining Change in output as a function of (1) i/o interindustry multiplier change, and (2) final demand change Explaining Change in final demand due to (1) changes in level, (2) changes in industrial mix, and (3) changes in final demand distribution

Decomposition: Output Change due to Final Demand vs. Intermediate Output

Decomposition Details

Decomposition Of Sources of Change in Output

Conclusions and Future Analysis (1) These data provide an unparalleled view of structural change in a region of the U.S. economy The data reported here may be quite different in other states Output has had a major realignment since the 1963 Washington Input-Output Model, labor productivity has shown major changes, and the level of exports has risen, particularly to foreign countries

Conclusions and Future Analysis (2) We need to extend the analysis of non- earnings components of value added We also need to include estimates of changing imports We look forward to comments on this presentation. We realize that there are major statistical issues associated with the analyses reported here, but we believe that this analysis provides a sound perspective on structural change in a growing regional economy in the United States