- July 20, 2016
- Posted by: eb5-economist
- Category: EB-5 Economics, EB-5 Job Creation
One of the main advantages of having an EB-5 project sponsored by a regional center is that jobs can be calculated using economic impact multipliers—which are used to demonstrate the total impact a commercial enterprise will likely have on a local economy. These multipliers take into consideration more than just the direct jobs created by the new business, and include the indirect and induced jobs that result from the presence of the new business within the region.
In other words, as the new commercial enterprise spends money on local goods and services—and as it pays its employees—the region’s economy will be benefited beyond just the job opportunities created directly by the new business.
Calculating direct, indirect, and induced job creation is advantageous for EB-5 investors since it allows them to more easily meet the employment creation requirement of the EB-5 Program.
To calculate direct, indirect, and induced jobs, however, the EB-5 Program requires reasonable economic analysis to be conducted in order to determine how the direct jobs created by a commercial enterprise result in the creation of indirect and induced jobs.
Indirect and Induced Jobs
Indirect jobs are created by the new commercial enterprise when it spends money on local goods and services. For example, a restaurant may buy furnishings and other supplies or equipment locally; it may also use local services for its linens, IT, maintenance, groundskeeping, etc. The increased demand for these goods and services results in increased employment opportunities within the region.
While indirect jobs are created through business-to-business spending, induced jobs are created through employee spending. As the new business and its suppliers pay their employees, some of that money enters the local economy as employees spend their wages. For example, employees might spend money at local retailers, restaurants, gas stations, service providers, etc., creating increased demand and, therefore, additional employment opportunities.
Economic Impact Models
As opposed to direct jobs, these indirect and induced jobs cannot simply be counted, and so economic impact models must be used to calculate how many indirect and induced jobs are created by a new business.
This calculation uses economic impact multipliers, which are generated using input-output models that consider the broader effects of a change within a region’s economy. A change to one industry inevitably affects other industries.
The two most commonly used economic impact models are RIMS II and IMPLAN. RIMS II is offered by the U.S. Department of Commerce through its Bureau of Economic Analysis (BEA). RIMS II multiplier tables can be purchased for any county, combination of counties, or state. IMPLAN is a privately-owned model that is more sophisticated than RIMS II but does allow users to generate economic impact multipliers.
Many multipliers exist for a variety of applications—for instance, some multipliers are used to estimate economic output while others estimate wages. For determining the economic impact of an enterprise within a region, the two most useful multipliers are direct-effect multipliers and final-demand multipliers.
Direct-effect multipliers, also referred to as employment multipliers, are values applied to the number of direct jobs created in order to determine total job creation, which includes indirect and induced jobs. For example, if a new business creates 14 new jobs and the direct-effect multiplier is 1.5, the total number of jobs can be determined by multiplying 14 by 1.5, which results in 21. So, in this example, 21 new jobs are created by the business, 14 directly and 7 through indirect and induced job creation.
Final-demand multipliers use revenues to determine job creation. The revenue value is calculated in millions of dollars and then multiplied by the final-demand multiplier. For example, if a new business earned $5.0 million in revenue and the final-demand multiplier was 13.0, the total number of jobs can be determined by multiplying $5.0 million by 13.0, which results in 65 direct, indirect, and induced jobs.
Economic analysis is specific to the region being considered—and so multipliers will be based upon the location of the new commercial enterprise. Considering the impact of a new business within its region is important because some indirect and induced jobs will have minimal or no effect on the local economy. For example, certain materials may need to be imported from another state.
Generally speaking, the smaller the area, the smaller the multiplier. For instance, a state’s multiplier for a particular industry may be 50% larger than the same industry’s multiplier in a particular county. The difference in the size of these multipliers is due in part to an economic principle referred to as leakage.
Leakage occurs when money is removed from an economy—in this case when money is spent on goods and services from outside the region. The more a business can purchase goods and services locally, the smaller the leakage and the greater the local economic impact.
In the past, USCIS has accepted the use of larger regional or state-wide multipliers for EB-5 projects. Now, however, that practice will likely be rejected.
In addition to being region specific, economic analysis is specific to the industry classification of a business as well. The variation between different industry’s multipliers is due to the different inputs relevant to each industry. A full-service hotel relies on a different set of inputs than a parts manufacturer does.
Generally speaking, service industry multipliers are smaller than manufacturing industry multipliers within the same region.