Check Your Understanding
1. Describe the difference between the direct and indirect workforce.
- Direct workforce: Construction workers are needed to build a new factory. Once the new factory is built it needs to be staffed with factory workers, administrative assistants, a cleaning crew and so forth. These are all examples of the direct workforce needed to sustain the factory.
- Indirect workforce: The contractors hired to build the factory will need, in turn, to contract with land management companies, law firms and other professionals. These companies will then purchase goods and services from other businesses. When the factory is up and running, the maintenance company hired by the Tesla (in the example) will need to purchase goods and services from other businesses, such as cleaning and plumbing supplies. These are all examples of the indirect workforce that contribute to sustaining Tesla’s factory.
- A key difference between the direct and indirect workforce is that those in the direct workforce would essentially be working for Tesla full-time. Those in the indirect workforce, such as the owners of hardware or plumbing supply stores, would sell goods and services to those in the direct workforce.
2. Define induced workforce.
In the example given, when Tesla hires people to work at its factory, those people earn wages that are then spent on other things like entertainment, health care and so forth. To the extent that the dollars earned by Tesla workers are re-circulated into the economy, these dollars help to support other jobs. In cases of very rapid build-up of industrial activity (as has happened with unconventional natural gas drilling in Pennsylvania, for example), entirely new businesses can sometimes spring up to serve new workers. These are all examples of the induced workforce.
3. True or False: The employment multiplier (or just “multiplier” for short) is defined as the ratio of the size of the indirect and induced workforce to the direct workforce.
4. True or False: Input-output models can be used to estimate both direct, indirect and induced workforce impacts because the databases collected by the government include data on consumer spending and saving.
5. Which of the following economic impacts is difficult to capture in an input-output model (select all that apply):
- Technology improvements in drilling natural gas wells will reduce the number of workers needed on the drill site within the next five years.
- Because of natural gas drilling, companies that operate fleets of trucks need to hire more workers and buy more trucking equipment.
- Marcellus Shale development in Bradford County, Pennsylvania, will lead to a major decline in unemployment in that County.
- If a planned ethane cracking plant is built in Pennsylvania, the availability of low-cost petrochemicals will lead to new industry coming into the state.
The correct answer is (a), (c), and (d). Explanation:
- Economic input-output models are “static” – they describe economic flows at a moment in time. Because industries tend to get more efficient and productive over time, it can be hard for input-output models to make projections about economic impacts in the future.
- Input-output models capture economic flows between sectors of the economy. If natural gas drillers demand more truck transport because they are drilling more wells, this impact will be captured by the input-output model.
- Input-output models cannot tell where workers will come from, only that they will be needed in specific economic sectors. These models thus cannot themselves predict changes in employment levels.
- Because input-output models are static, they are not usually good tools for forecasting growth or contraction in industries other than the one being directly studied. An input-output model would assume that, despite the new ethane cracking plant, industry in Pennsylvania would demand the same amount of petrochemicals as they had historically.