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Questions and Answers
Explain the economic ripple effect of job creation?
The location of a new firm, or the expansion of an existing one, has
an overall impact on the economy that is greater than just the direct
impact associated with that initial increase in economic activity. The
easiest way to understand this is probably with a simple example.
Suppose a new firm locates within South Carolina. This firm will hire
workers and other inputs to produce a good or a service. Imagine a
manufacturing firm producing widgets; the firm hires the necessary
number of workers to create a certain number of widgets per month. These
workers represent the direct impact on jobs in South Carolina.
However, this widget producer will also need to purchase other
inputs, including the raw materials needed to produce widgets, trucks
needed to transport the widgets, and lawyers and accountants to make
sure records are being kept the right way. Therefore, this new
manufacturer will create additional demand for the goods and services
produced by many other firms in many other industries. The positive
impacts on the activity of other manufacturing industries,
transportation industries, and service industries will translate into a
greater level of employment in these industries that supply to the
widget producer. These jobs represent the indirect impact on
employment.
Finally, all of these workers (at the widget factory and in those
industries supplying to the widget factory) will be spending their
incomes in a number of ways – at restaurants, on entertainment, on
health services, buying boats, and so on. Therefore, a portion of the
business at these various firms can be attributed back to the activity
of the widget producer. The jobs supported in these varied sectors are
jobs supported via the induced impact. Of course, the restaurant
worker will spend her wages in a variety of ways, and a small portion of
these expenditures can likewise be traced all the way back to the
presence of the widget factory.
This interwoven chain of economic activity clearly becomes
complicated, yet it also is quite logical once you think through the
ways money flows from industry to industry through either business
purchases of inputs or household spending on goods and services. One way
to capture all of these linkages is through the use of an economic
multiplier. A multiplier could tell us, for example, how much total
economic activity is generated from the production of a dollar’s worth
of widgets. Or how many total jobs are supported for each job at the
widget factory (or each job at a restaurant, or a construction site, or
a university).
The precise value for such a multiplier varies across industries and
across geographic areas. It would generally be larger for industries in
manufacturing or construction, and relatively lower in retail trade. On
average in South Carolina, an employment multiplier is close to 1.6. So,
without regard to the specific industry, or the specific region of the
state, the creation of 100 new jobs supports an addition 60 jobs, for a
total job impact of 160. It is important to stress again, though, that
this is just an average figure, and there can be a great deal of
variation in this multiplier value based on the specific circumstances
in terms of the specific type of business and area of business where the
100 direct jobs are located. The appropriate multiplier value must come
from a specific structural model of the economy.
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