Economic Impact Analysis
Prepared by Dr. Frank Puffer
Professor of Economics
Clark University
Introduction
The estimation of the economic impact of an organization on the economy of the county or state it is located in is in essence an attempt to determine what differences the organization has made to the economic life of its surrounding community. The task is quite similarly undertaken in that classic 1964 movie “ It’s a Wonderful Life”, which shows the impact on the community of the main character (played by James Stewart) through the device of imagining that he had never been born and then showing what would have happened as a result. An economic impact analysis takes that same idea and applies it to measurable economic effects, ordinarily changes in employment and total output.
Unfortunately, the usual economic impact analysis can’t estimate all of the economic impacts the organization has on the region since it is often extremely difficult to measure some of these impacts. For example, a college has a major impact on the economy through graduating well-informed and knowledgeable individuals who able to more easily acquire skills and make more substantial contributions to the economic and overall quality of life in the region. Likewise, a social services agency which provides an after-school sports program makes an important and long lasting contribution to the well-being of some of the young participants, but in both the college and social services case, it is extremely difficult to make a defensible numerical estimate of just how large the contribution is. As a result of these problems, the usual impact analysis confines itself to just the measurement of the economic size of the organization being studied and the multiplier effects caused by the organization’s spending and employment. These multiplier effects result from additional business being created in the surrounding community by the spending undertaken by the organization. The purchases of fuel oil, file folders, computers, and thousands of other items from local businesses stimulates additional revenue and employment for those businesses who in turn spend more themselves and thus stimulate still more business activity in other businesses in the area. The same holds for employment. The employees of the organization being studied spend their wages at least in part at local businesses and that also stimulates a chain of subsequent spending in the region. The usual economic impact analysis confines itself to estimating the total cumulative impact in both output and employment resulting from the presence of the organization.
In the case of The Martin Luther King, Jr. Business Empowerment Center (MLKJ-BEC), we can fortunately do better than this in estimating the economic impact. The nature of the mission of the MLKJ-BEC which focuses on helping the minority community of Worcester get jobs and create businesses, makes it possible to estimate not only the usual economic impact of its operation, but also the economic impact of their programs and thus allows a far more comprehensive and accurate estimate of the total economic impact than the usual more narrow analysis permits. This is a very important difference in that it allows one to see a far more complete picture of the real economic impact of the MLKJ-BEC. The rest of this document will consider in turn four aspects of the economic impact the MLKJ-BEC. The first will be the usual more traditional economic impact effects of the operation of the organization. This will be followed by three sections devoted to the economic impacts of the three main parts of the organization’s mission: The Business Incubation program, the Employment and Training program, and the Business Information Center program. Finally there will be a summary of the findings.
A brief note about underlying methodology used in the report. There are a number of different methodologies that can be used in economic impact analysis. The one used here is based on the U.S. Department of Commerce Regional Input-Output Modeling System (RIMS II), which takes advantage of very detailed knowledge of inter-industry relationships which would be prohibitively expensive for individuals to obtain on their own. The impact estimates using RIMS II tend to be more conservative than those found using simpler economic base models, but are in turn more accurate and reliable. All impacts are estimated for 2002.
The Economic Impact of the Business Empowerment Center – The Traditional approach
The economic impact of a business depends on a number of factors. The first of these is the degree to which other business or organizations in the area can provide equivalent products or services. For example, if we consider the economic impact of a new shopping mall in a city, we have to be careful not to assume that all the jobs and sales revenue at the new mall are additions to the economy. In general a substantial proportion of the new mall’s sales will come as the result of simply diverting sales from existing malls and thus represent far less of stimulus to the local economy than might otherwise be thought. The Business Empowerment Center, however, is rather unique in the Worcester region. While other organizations overlap to some extent, particularly in the area of job training and placement, the MLKJ-BEC combination of a focus on relatively underserved minority populations and a comprehensive range of services make it an organization with no obvious substitutes in the region, so it is reasonable to assume that its role is not one that could or would be quickly and easily filled in its absence. If the MLKJ-BEC did not exist, the vast majority of those it serves would not be able to obtain the services they now receive.
The route by which the traditional economic impact occurs is through the spending of the organization itself (the direct impact), the additional spending generated in the businesses that supply the organization, and the businesses that supply the businesses that supply the organization, etc. (the indirect impact), and the direct and indirect effects of spending by the employees of the organization (the induced effect). The total impact includes all of these spending effects.
Another factor which affects the magnitude of the economic impact is the size of the region. If we look at a large geographic area, the impact will also be larger since it is more likely that a greater number of the organizations suppliers will be located in the region the larger it gets. In the limit the largest economic impact will be found for the organization’s impact on the world economy since all of the suppliers would be included. The RIMS II model regions are restricted to states and counties and as a result the impacts are provided for Worcester county and Massachusetts. If one is interested in smaller regions, such as the city of Worcester, it is possible to make rough estimates based on the proportion of the organization’s employees and suppliers in the smaller region, although this is not done in this report. The final factors are the economic size of the organization and the type of activity it is engaged in. The MLKJ-BEC has attributes of a number of different types of activity. It combines real estate rental, job training, and social service activities, among others, all of which need to be taken into account in the final analysis. Once this is done, the traditional economic impact of the MLKJ-BEC for 2002 is as follows:
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