SCOTTISH EXECUTIVE

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Scottish Economic Statistics 2000

Economic Impact Analysis - The effect of a company opening or closure

Economic impact analysis focuses on the impact of a specific event - for example a company opening or closing - and attempts to identify which sectors of the economy will be affected and how much of the impact will be felt locally.

For illustration, a hypothetical closure of a company in the Spirits and Wine industry, employing 100 people is considered.

In assessing the impact of the closure we estimate:

• effects on suppliers of the company
• effects on the economy due to a reduction in the spending of the former employees
• proportion of the above effects which will be borne by the local economy
• the likely increase in the number of people registered as unemployed in the local area

It is not practical to identify every purchase made by the company along with the relevant source, or the domestic expenditure of each company employee. However, the analysis of such events is necessary to allow an understanding of the implications on the Scottish economy. The input-output tables and multipliers allow us to estimate the impact of such a closure by assuming that the company and individuals will follow similar purchasing patterns to those identified through the surveys used to inform the input-output balances (e.g. Annual Business Inquiry, Scottish Manufacturing Trade Flow survey etc.), and hence allow us to estimate the full economic impact of the closure on the economy as a whole.

This is achieved by employing the appropriate multipliers for the type of industry concerned and a number of assumptions relating to local impacts and unemployment. For the illustrative example, the multipliers used will be for the "Spirits and Wines, etc" Input-Output group.

Effects on Suppliers (Indirect Employment Effect)

From the 100 direct job losses, the 'Spirits and Wines' Type I employment multiplier gives:

100 x 3.1832 = 318 direct and indirect job losses.

The number of direct job losses would be 100, from which the additional indirect job losses throughout the Scottish economy are estimated to be 218.

Effect of Reduction in Consumers Expenditure (Induced Employment Effect)

In addition to the effect of job losses due to the reduction in industrial demand, there would also be the effect of the reduction in expenditure of the employees who have lost their jobs through both the direct and indirect employment effects. This is the induced effect and is estimated using the Type II multipliers.

From the 100 direct job losses, the 'Spirits and Wines' Type II employment multiplier gives:

100 x 3.6142 = 361 direct, indirect and induced jobs.

There would be 318 direct and indirect job losses, giving an estimate of 43 further induced job losses throughout the Scottish economy.

Table 2: Estimated employment effects by industry

Source: Scottish Executive

It is possible to disaggregate the direct, indirect and induced employment effects by industry, as shown in Table 2.

From Table 2, it is possible to see that, although the closure of this company will have a direct effect on the Spirits and Wine industry, it is also possible to identify the other main industries which would be affected by the closure (e.g. glass and glass products, retail distribution, business services etc.)

Local Impact

The above analysis produces estimates of the total direct, indirect and induced job losses throughout Scotland. To assess the local impact, it is necessary to identify the local multiplier effect. In order to do this, assumptions need to be made about how much of the Scottish multiplier effect is felt locally. This depends on how many suppliers are "local" and how much income is spent locally. Trhese are complex issues, but assuming for illustrative purposes that 50% of the indirect and induced effects will fall in the local Travel to Work Area (TTWA), there would be an estimated 231 jobs losses in the local TTWA.

Effect on the Local Unemployment

The estimated number of job losses in the TTWA does not automatically equate to the increase in the number unemployed in that area. Not everyone who loses their job will register as unemployed. There are a number of reasons for this:

• re-employment
• training schemes/further & higher education
• outward migration
• people leaving the labour market

When estimating the number of people likely to register, it is necessary to consider such questions as: the current unemployment rate in the area and the availability of other similar work - is the industry a new or old one, are there other companies from this industry operating in the local area? The profile of the employees can also assist in the prediction of any unemployment increase. Demographics such as age, sex, employment status (part-time/full-time) etc have been shown to relate to the propensity to register as unemployed.

These are complex issues, but assuming for illustrative purposes that on average, approximately 75% of people will register as unemployed, an estimated 173 people would register.

Of the 173 people identified, not all will reside in the local area and subsequently not all will be registering as unemployed in that area. A final step in the analysis is to identify those who will be registering in this area through deploying a containment ratio. These can be obtained from census data and show the proportion of people working in an area who also reside in that area. If, for example, the containment ratio is assumed to be 80 per cent. Applying this to the previous calculations yields an estimate of an increase of 138 registered unemployed in the local area.

The estimated employment impact of the closure of a Spirits and Wine company employing 100 people is detailed below.

Further Extensions to Input-Output Tables

This paper has presented 2 examples of the analyses that can be carried out using input-output tables and the derived multipliers. input-output tables can also be used as a basis to produce further more detailed work on specific areas. A recent extension to the input-output work that has been produced is the Scottish Labour Market Intelligence Project. This project was undertaken jointly by Strathclyde University and the Scottish Executive Enterprise and Lifelong Learning Department for the Scottish Higher Education Funding Council and Scottish Enterprise. Further details on this work are presented in an executive summary which is available on request.

Further information on the derivation and applications of input-output tables and multipliers can be obtained from Maria Melling (maria.melling@scotland.gov.uk) and Lynn Graham (lynn.graham@scotland.gov.uk)

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