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

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

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

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

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 fixedWages are assumed flexible

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

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

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.

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

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

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

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

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

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.

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 )

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

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

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

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

Comparison Tableau

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Appropriateness of the Model Assumptions Wages are allowed to change D D` S Wages Employment0 ABC S Wages Employment0 ABC S Wages Employment0 ABC Omit this slide

Appropriateness of the Model Assumptions Wages are assumed constant Wages Employment0 D S D` ABC Omit this slide