Economic Impact: Methodology & Terms
February 15, 2021
By Kenneth Stanton PhD
Open Works Baltimore [www.openworksbmore.org] was founded in 2016 to rebuild the city’s manufacturing economy from the grassroots up. Now one of America’s largest non-profit makerspaces, they support 118 jobs and work with over 1,000 young people a year through educational programs. They help entrepreneurs to learn new skills, launch new businesses, or build new relationships in Baltimore’s largest creative community.
Open Works is funded by the state and local governments, plus donations from foundations and individuals. Half its revenue comes from programming and services.
In 2019, Coppin State University published the first economic impact report ever conducted on a makerspace in the United States. Download the report: [www.openworksbmore.org/wp-content/uploads/2019/12/OW-CoppinState-Report.pdf]
This analysis of the economic contributions of Open Works on the Maryland and Baltimore economies was prepared using input-output models for the State of Maryland and the City of Baltimore. An input-output analysis examines the relationships among businesses and final consumers. Input-output analysis is based on the use of multipliers, which describe the response of an economy to a change in demand or production. Multipliers measure the effects on an economy from a source of economic activity, in this case the jobs and revenues associated with the construction and subsequent operation of Open Works.
The economic activity generated in a city, county, region, or state is greater than the simple total of spending associated with the event or activity being studied. This is because as this money is earned it is in turn spent, earned, and re-spent by other businesses and workers in the local economy. However, the spending in each successive cycle is less than in the preceding cycle because a certain portion of spending “leaks” out of the economy in each round of spending. Leakages occur though purchases of goods or services from outside of the region and via federal taxation. The multipliers used in such an analysis capture the effects of these multiple rounds of spending based on observed spending patterns within the region of study.
This analysis focuses on three measures of economic impact:
- Output. The total value of production or sales in all industries.
- Employment. The total number of full and part time jobs in all industries.
- Labor Income. The wages and salaries, including benefits, and other labor income earned by the workers holding the jobs created.
Four measures of the economic activity and impact of the construction spending and operating expenditures of Open Works are included in this report:
- Direct effects. The change in economic activity being analyzed—in this case the jobs and revenues directly associated with Open Works.
- Indirect effects. The changes in inter-industry purchases, for example the purchase of goods or services to support the construction and production activities, in response to the change in demand from the directly affected industry.
- Induced effects. The changes in spending from households as income and population increase due to changes in production.
- Total effects. The combined total of direct, indirect and induced effects.
Here's a concrete example (pun fully intended):
A new construction project involves the purchase of $10 million in concrete. That's a direct effect of the construction, as would be the hiring of all the workers who are tasked with putting the concrete into place, forming and finishing, etc.
The drivers of the cement trucks buy their lunches from restaurants next to the building site. That's an indirect effect.
The money spent at the local restaurants allows the foodservice workers to go out and buy new cars. The car salesmen profit from these extra sales so they too go shopping and buy big screen TVs and more wine. Clearly these impacts continue to ripple through the economy as the additional purchases create more employment and more wage payments, which in turn replicate similar (although ever-diminishing) effects. All of these are induced effects.
Kenneth Stanton holds a PhD (York University) an MBA (University of Rochester) and an Honors BA (University of Western Ontario). For more than two decades, he was a finance and economics faculty member at various US and Canadian universities while simultaneously serving as an adviser to local, state and federal governments, including a sitting president of the US. His consulting work includes clients in the energy sector, banks, financial regulators, government agencies, retailers, universities and non-profit entities. Dr. Stanton has (co)authored numerous journal articles and books and has extensive experience in high level economic and statistical analyses.