INTRODUCTION
Multipliers measure the economic change within a Region that stems from economic activity from a change in Final Demand. They are a measure of an Industry's connection to the wider local economy by way of input purchases, payments of wages and taxes, and other transactions. They are the total production impact within the Region for every unit of direct production.
There are two main types of multipliers. For more details, check out the article Understanding Multipliers.
Type I Multiplier = (Direct Effect + Indirect Effect) / (Direct Effect)
Type SAM Multiplier = (Direct Effect + Indirect Effect + Induced Effect) / (Direct Effect)
And yes, sometimes they are negative. Here are the details.
DETAILS
Let’s take a look at an example. In Alabama 2018 Industry 23 - Iron Ore Mining, there is negative Proprietor Income.
> Study Area Data
> Industry Detail
So we know that there was a net loss for Proprietor Income in 2018 in this Industry. Proprietors could have lost money or spent more money from savings than they earned. This doesn’t mean that they went out of business. They could be just using savings or borrowing money to maintain their cash flow. For further details on why this happened, read the article The Curious Case of the Negative Tax: Agriculture Subsidies, Profit Losses, and Government Assistance Programs.
Labor Income is equal to Proprietor Income + Employee Compensation. Because we saw a negative in Proprietor Income that was larger than the positive Employee Compensation, there is negative Labor Income in this Industry. When we analyze increased production in this industry, IMPLAN estimates negative Direct Labor Income. When an Industry has this negative relationship between Output and Labor Income, the total Labor Income supported by increased production is typically positive while the Direct Labor Income is negative. This produces a negative Labor Income Multiplier.
> Multipliers
> Summary Multipliers
> Labor Income Multipliers
In a bad year (low prices or spikes in operational costs), an Industry can lose money. Losses in any piece of Value Added (Employee Compensation, Proprietor Income, Taxes on Production & Imports, or Other Property Income) can create a negative multiplier if those losses aren’t offset by larger gains in another piece of Value Added. For example, in IMPLAN, the combination of Proprietor Income and Other Property Income equals operating surplus. The operating surplus of an Industry is simply its profits – that is, value of production minus all operational expenditures. If the negative operating surplus exceeds Employee Compensation plus Taxes on Production & Imports, then total Value Added will be negative. Industries with a negative relationship between Output and Value Added usually have a negative Value Added Multiplier, like in the case of Labor Income.
RELATED ARTICLES
The Curious Case of the Negative Tax
Written June 16, 2020