Interpreting Input-Output Multipliers
Gary W. Zinn, Ph.D
Department of Economics, East Carolina University
April, 2008
One of the powerful aspects of regional input-output (I-O) analysis is that it estimates the
total economic effects of changes in a given activity on the region’s economy. Of
particular interest are employment and income multipliers, which reveal the effects of
any given change in employment and associated income in a particular activity on the
region’s total employment and income.
Mathematical manipulation of a regional I-O model produces both “Type I” and “Type
II” employment and income multipliers. The interpretation of these is illustrated by a
simple example:
Suppose that there is an increase in production (output) by activity A in region R. To
increase its output, activity A must of course employ additional labor – say 200
employees. But for A to increase its output it must acquire additional inputs from other
activities, some of them within the region; i.e., activities B, C, etc., will be called on to
supply additional inputs to A. Suppose that this will require those within-region activities
that supply additional inputs to activity A to hire 80 more employees. At this point, the
increase in employment that has occurred because of the increase in A’s output is 280
employees – this is the direct employment effect of the increase in activity A’s output.
And there are further employment effects of activity A’s increase in output, because the
increased output of those activities that supply A means that they must, in turn, acquire
more inputs, which means that their suppliers (within the region) must hire (say) 40
additional employees. This is called the indirect employment effect of the increase in
activity A’s output.
A Type I employment multiplier measures the direct and indirect effects of a change in
output by a particular regional economic activity on total employment in the region. To
complete the example, if the Type I employment multiplier for activity A in region R is
1.6, then the total direct and indirect employment effect of a 200 person increase in
employment in A would be 320 (200*1.6). This includes the initial increase of 200 in
activity A, plus an increase of 80 in those activities that directly supply inputs to A, plus
an increase of 40 in those activities whose employment levels are indirectly increased by
A’s output growth.
Note that multiplier effects work in both directions. I.e., if employment in activity A
were to decrease by 200, with a Type I multiplier of 1.6, then the direct and indirect
employment effect would be a negative 320. The same principle holds for income
multipliers (discussed below).
Turning to income multipliers, assume that the 200 additional employees in activity A
earn a total of $6.0 million in income, and that the relevant Type I income multiplier is
1.5. Then the total increase in income earned within the region would be $6.0 million
times 1.5, or $9.0 million. This is the total increase in income earned by those additional
employees within the region’s economy who directly and indirectly contribute to the
increased output of activity A.
Type I income multipliers provide a point of departure to understand Type II multipliers.
A portion of the $9.0 million in additional earnings cited above will be respent within the
region’s economy, which will further stimulate employment and income. Type II
multipliers add this induced effect to the Type I direct and indirect effects discussed
above.
Continuing our example, if the Type II employment multiplier is 1.8, then the initial
increase in employment in activity A (200) will ultimately result in a total increase in
regional employment of 360 (200*1.8). Similarly, if the Type II income multiplier is 1.7,
then the $6.0 million increase in income generated by activity A will ultimately result in a
total increase in regional income of $10.2 million.
I-O multipliers are very revealing, in that they clearly show the total regional
employment and income effects of any given instance of growth or decline within a
region’s economy.
Example of a multiplier analysis tabulation
The next page contains a table showing hypothetical values of the total changes in
employment and income in a region over a given five year period, along with values of
corresponding changes in these variables in the region’s economic base activities. The
table also shows, in percentages, how much of the total regional change in employment
and income is accounted for by the employment and income changes in the economic
base activities.
Then, applying hypothetical Type I and Type II employment and income multipliers, the
multiplier effects of the changes in the economic base activities are calculated, in both
numbers and percentages of the region’s total change.
In this example the change in economic base directly accounts for 25% and 30% of the
region’s total change in employment and income, respectively. Next, multiplying the
direct changes in these variables by the Type I multipliers shows that, directly and
indirectly, the changes in economic base employment and income account for 40% and
45% of the region’s total changes in employment and income generated by its producing
sectors. Then, multiplying the direct changes by the Type II multipliers shows that the
additional induced effects (of the additional income that is respent within the region’s
economy) raises the grand total effects of the initial changes in the economic base
activities to 45% and 51% of the region’s total change in employment and income,
respectively, in the period.
Table __: Multiplier analysis for a hypothetical economy, 1997 - 2002
Part I
Employment
Region Total
Economic base activities
Total
1997
Employment
2002
% of regional
total change
200,000
202,000
2,000
100
58,000
58,500
500
25
Change
Type I employment multiplier
1.6
Type I employment effect
800
Type II employment multiplier
1.8
Type II employment effect
900
Part II
Income
Region Total
Economic base activities
Type I income multiplier
Type I income effect
Type II income multiplier
Type II income effect
Total
1997
Payroll ($1000)
2002
Change
($1000)
40
45
% of regional
total change
5,500,000
5,550,000
50,000
100
1,000,000
1,015,000
15,000
30
1.5
22,500
45
1.7
25,500
51