How an industry’s economic impact is determined


mindy-column-sigHow do we determine the economic importance of an industry? Maine has long been a state with an economy very tied to using our forest resource – from ship masts to lumber to pulp and paper. It’s useful to know just how much that resource means to our state, in dollar terms, and there are many ways to go about generating that dollar amount. Below is a brief overview of how we generated the numbers used in Economic Contribution of Maine’s Forest Products Industry, 2014 and 2016 (estimated), which you’ll also find in Maine’s Forest Economy, compiled by MFPC

Economic impact analysis attempts to quantify the additional or net economic changes that occur when an industry brings new revenues into a region. Since Maine’s forest products industry (FPI) is export driven – the majority of our forest-derived output is consumed out of the state – it would be easy to add up the value of those products sold or the number of people employed directly in the industry. However, if we count just the direct effects, we risk missing the additional economic activity that we know the FPI generates by spending those revenues within Maine. When we sell exports to the rest of the country (and the world), some of that revenue received stays in and supports our local economy, through many channels. To track that total value, we used IMPLAN.

Maine's Forest EconomyIMPLAN is an industry standard input-output model that accounts for both the direct and indirect economic impact of an industry. IMPLAN was developed by the USDA Forest Service in the 1970’s to deliver accurate and timely estimates of economic impacts of forest resources. It is now a private company, but the ease with which users can adjust the underlying data and models is a direct result of its publicly funded origins. It is important to understand that input-output analysis are static, not dynamic, and that they assume that the relationship between inputs and outputs remains the same over the short term.

The state of Maine has a highly inter-dependent FPI comprised of multiple sectors. For our analysis, we identified seven sectors as core: Harvesting, Biomass Electricity Generation, Sawmills, Plywood & Veneer, Pulp & Paper, Wood Products Manufacturing, and Wood Furniture. These sectors are all directly linked to the use of the forest resource. We then defined five key FPI support sectors: Regeneration & Management, Machinery Repair & Lease, Transportation, Research, and Land Lease. While the FPI relies on inputs from these sectors, they also contribute to other industries; trucking, for example, moves all kind of products around the state, not just forest products. Our analysis takes this into consideration, along with impacts that ripple through the whole economy, with multipliers.

IMPLAN breaks down the impact of a sector into three components: direct, indirect, and induced. It also tracks these impacts across multiple categories: employment, income (compensation and profits), output (sales), and value-added (output minus the cost of intermediate inputs; this includes payments made to employees, interest, profits, and indirect business taxes).

Direct impacts are straightforward and easy to count. Indirect impacts result from the sector’s purchases of goods and services from supporting sectors as a part of doing business – for example, a paper mill purchasing electricity and chemicals to make paper. As these supporting sectors produce the goods and services, they generate indirect employment, wages, production, and value-added. Finally, induced impacts are those generated by the household purchases of employees in both the primary and support sectors; imagine a sawmill worker taking her family out to dinner, which provides income to a local restaurant owner. The direct effect of production activity in a sector thus has additional effects that are larger and are collectively called multiplier effects (multiplier = indirect + induced effects). Industries that are more labor-intensive, or pay higher wages, will tend to have larger induced effects and smaller indirect effects.

You can see multiplier effects in the difference between the estimated direct employment in the FPI in 2016 (14,562) and the total impact, in terms of employment, of the FPI (33,538). Once we capture the indirect and induced impacts, the FPI’s estimated direct output in 2016 of $4.8 billion represents a much larger economic impact to the state of Maine – $8.5 billion[1]. That’s a number that communicates how important the industry is to the state.

[1] 2016 numbers are estimated from 2014 results and known changes in the industry. Actual employment, output, and labor income information necessary for calculating impact for 2016 will not be available until 2018.