4. Multiplier Analysis

4.1 Introduction

4.1.1 This chapter reports the values of various multipliers and other coefficients which can be produced from relatively simple manipulation of the SAM reported in the previous chapter. Essentially, these multipliers measure how the Western Isles economy would behave in response to external "impacts" according to the most straightforward assumptions, e.g. unchanged "technology" (cost structures), no supply-side constraints, and constant household consumption patterns.

4.1 Open IO and SAM Multipliers

4.1.1 The "open IO" or basic (Type 1) multiplier shows the total change in the value of output in the economy due to a unit increase in final demand for a particular sector's output. Since only the industry accounts are treated as endogenous in this case, i.e. the behaviour of factors such as households etc. are treated as exogenous and independent of industrial activity levels, these multipliers include the direct and indirect effects but not induced effects.

4.1.2 The first column of coefficients in Table 4.1 shows that the largest multiplier effect in the Western Isles economy is possessed by Agriculture, at a value of about 1.9. That is, a £1000 (say) increase in demand for farming output generates an additional £900 in the output of all sectors of the local economy, as agricultural expansion increases demand for inputs and services in the Western Isles economy. Of course, a decline of £1000 in the value of demand for farm output has an equally large but negative effect on the Western Isles economy.

4.1.3 The next largest multiplier coefficients are possessed by Food and Drink Manufacturing and Processing (1.8), Fish Processing, Preserving and Wholesaling (1.72) and Sea Fishing (1.66), followed by Media (1.54) and Textiles (1.48). Other sectors have multipliers lower than 1.37. Multipliers for Other Services and Public Administration are 1.0 since these sectors purchase few or no inputs. These results demonstrate the still-important role of primary sectors in the Western Isles economy: although they may have declined in relative or absolute size, fluctuations in demand for their products (which are mainly exported to the mainland and beyond) have unusually high effects on the Isles economy. However, in general the multipliers are all fairly low, as expected given the open nature of the Western Isles economy.

Table 4.1 Open IO and SAM output multipliers

	Industry	Open IO (Type 1)	Rank	SAM	Rank
1	Agriculture	1.908	1	2.068	1
2,3,5	Sea fishing	1.663	4	1.907	4
4	Fin fish farming	1.168	16	1.473	13
6	Electricity, gas, water	1.319	9	1.520	8
7	Extraction of ores, crude petroleum etc.	1.032	24	1.385	20
8	Textiles	1.485	6	1.667	7
9	Pottery and jewellery	1.113	21	1.351	24
10	Food and drink manuf. & processing	1.808	2	1.968	3
11	Fish processing, preserving, wholesaling	1.720	3	1.983	2
12	Other manufacturing	1.131	19	1.350	25
13	Construction	1.194	14	1.389	19
14	Distribution	1.226	13	1.442	15
15	Hotels	1.280	10	1.514	10
16	Other accommodation	1.273	12	1.393	18
17	Catering	1.037	23	1.379	21
18	Land transport	1.142	17	1.469	14
19	Air transport	1.363	8	1.517	9
20	Sea transport	1.369	7	1.680	6
21	IT services and telecommunications	1.192	15	1.504	11
22	Banking and Insurance	1.046	22	1.146	26
23	Media	1.538	5	1.786	5
24	Education	1.141	18	1.406	17
25	Health	1.126	20	1.415	16
27	Other public services	1.283	11	1.487	12
28	Other services	1.000	25	1.368	23
29	Public administration	1.000	26	1.374	22

4.2.4 SAM output multipliers are defined similarly to the open IO multipliers above, but in this case the factors, accounts and household groups are treated as endogenous in the system. Thus the SAM multiplier effects allow for induced feed-backs as re-spending of incomes occurs. Technically, the model solves for the structure of production, the distribution and level of income in the economy simultaneously.

4.2.5 The second column of multipliers in Table 4.1 shows the values of these SAM multipliers. Again, Agriculture has the highest value at about 2.07, followed by the same group of sectors, i.e. Fish Processing (1.98), Food Manufacturing (1.97), and Sea Fishing (1.91). The lowest SAM multiplier value belongs to Banking and Insurance at 1.15, but many others are around 1.4. Thus re-spending by households whose incomes come mainly from these sectors helps to generate additional output effects over and above those relating to inter-industry dependencies.

4.2.6 Though all SAM multipliers exceed the open IO values (because income-related expenditure changes are allowed for), few sectors change rank significantly. Other Manufacturing slips from 19^th to 25^th place, and Other Accommodation from 12^th to 18^th, suggesting that the induced effects in these miscellaneous sectors (probably of small-scale enterprises) are relatively small in magnitude. This, in turn, can be traced back to the low factor earnings associated with these sectors in the base year of the model.

4.3 SAM household multipliers

4.3.1 These multipliers measure the total effect of a unit change in income of a particular household group (rather than change in demand for sectoral output as in the previous section) on the incomes of all households in the economy. This effect might be brought about by, for example, a change in the income tax regime, or a change in value of transfer earnings (social security payments, pensions, etc.) from outside the region. One interpretation of these multipliers is that they measure the "trickle-down" effect of changed income or wealth in one group on society in general.

4.3.2 The results are shown in Table 4.2. Usually households in SAM models are split according to income criteria and show limited "trickle-down". That is, giving more income to the rich is a less efficient way of increasing incomes across the board than giving more income to the poorer households. This is mainly because the former have a higher propensity to save and higher consumption of imports. In the present study, retired households in the Western Isles generate the largest increase in total household income. For this group, a £1000 expenditure injection (due, for example, to decreased direct taxation or increased pensions) results in an additional £238 increase in total Western Isles household income. This £238 increase is shared between other retired households and households with and without dependants, even though these do not benefit directly from the additional economic activity stimulated by the injection.

Table 4.2 SAM household multipliers, Western Isles 1997

	Injection to:
Impact on:	Adults, no dependants	Adults plus dependants	Retired
Adults, no dependants	1.086	0.086	0.106
Adults plus dependants	0.104	1.108	0.125
Retired	0.005	0.009	1.007
Total	1.194	1.203	1.238

4.4 Employment Coefficients and Effects

4.4.1 Employment coefficients measure the amount of employment (measured in full-time equivalents, FTEs) required per unit output of each sector. As shown in Table 4.3 (first pair of numerical columns), the highest value is given by Public Administration, with 0.118 FTE jobs required per £1000 of own "output". Agriculture leads the rest of the sectors, with 0.075 FTEs per £1000 of output, followed by Catering, and Other Services.

4.4.2 Employment effects measure the amount of employment generated in the whole economy as a result of a unit increase in demand for output from a particular sector. Naturally, these exceed the values of the employment coefficients, since inter-industry links are taken into account, but the general ranking of sectors is maintained, though Food and Drink Manufacturing rises to fourth place (see Table 4.3, second pair of numerical columns). Agriculture has an employment effect of 0.121, indicating that a £1000 increase in final demand for agricultural output leads to a total increase in Western Isles employment of 0.121 FTEs or alternatively a £1 million increase in such final demand leads to 121 additional jobs.

4.4.3 Employment multipliers measure the increase in total employment resulting from a unit increase in employment in one particular sector. The final column of Table 4.3 shows that the highest values, with over 2 FTE jobs generated for every one in the initial sector, are shown by Fish Processing, Air Transport, Food Processing, Other Public Services and Fish Farming.

Table 4.3 Employment coefficients, effects and multipliers, Western Isles 1997

		Employment Coefficients*		Employment Effects**		Employment Multipliers ***
		value	rank	value	rank	value
1	Agriculture	0.075	1	0.121	1	1.613
2,3,5	Sea fishing	0.038	7	0.063	6	1.658
4	Fin fish farming	0.010	24	0.021	24	2.100
6	Electricity, gas, water	0.022	15	0.034	18	1.545
7	Extraction, petroleum	0.032	11	0.041	13	1.281
8	Textiles	0.038	6	0.060	7	1.579
9	Pottery and jewellery	0.031	12	0.039	14	1.258
10	Food manuf. & proc'g	0.033	10	0.076	4	2.303
11	Fish proc'g, prsv'g,whol'g	0.014	21	0.045	10	3.214
12	Other manufacturing	0.042	5	0.049	9	1.167
13	Construction	0.020	17	0.029	19	1.450
14	Distribution	0.022	16	0.035	17	1.591
15	Hotels	0.038	8	0.053	8	1.395
16	Other accommodation	0.030	13	0.043	12	1.433
17	Catering	0.069	3	0.078	3	1.130
18	Land transport	0.013	22	0.024	22	1.846
19	Air transport	0.006	26	0.017	25	2.833
20	Sea transport	0.024	14	0.036	16	1.500
21	IT services and telecoms	0.016	20	0.028	20	1.750
22	Banking and insurance	0.013	23	0.016	26	1.231
23	Media	0.020	18	0.036	15	1.800
24	Education	0.017	19	0.027	21	1.588
25	Health	0.034	9	0.043	11	1.265
27	Other public services	0.010	25	0.022	23	2.200
28	Other services	0.061	4	0.070	5	1.148
29	Public administration	0.118	2	0.127	2	1.076

Notes:

* FTEs per £'000 output

** FTEs per £'000 change in final demand

*** Output per FTE

4.4.4 Occupation-employment effects are like the simple employment multipliers defined above, except that they relate to each type of employment rather than total employment. The values are shown in Table 4.4. The totals for each sector sum to the values in the previous table. For example, reading across the top row of the table indicates that of the 121 jobs created from a £1 million increase in final demand for agricultural output, 49.4 would be classified as managerial (which includes farmers), 0.8 as professional, 25.9 craft-related, and so on.

Table 4.4 Occupation-employment effects, Western Isles 1997

		1. Managers, Admin.	2. Prof-essional	3. Assoc. Prof. Tech.	4. Clerical and Secretarial	5. Craft and Related	6. Personal & Prot. Serv.	7. Sales	8. Plant & Mach Operatives	9. Other	Total
1	Agriculture*	0.0494	0.0008	0.0007	0.0051	0.0259	0.0007	0.0018	0.0058	0.0306	0.1209
2,3,5	Sea fishing	0.0155	0.0010	0.0009	0.0022	0.0059	0.0010	0.0013	0.0058	0.0290	0.0626
4	Fish farming	0.0047	0.0008	0.0006	0.0016	0.0023	0.0009	0.0010	0.0013	0.0083	0.0214
6	Electricity, gas, water	0.0018	0.0019	0.0019	0.0061	0.0093	0.0014	0.0030	0.0059	0.0023	0.0335
7	Extn. of ores, petroleum etc.	0.0050	0.0008	0.0007	0.0014	0.0131	0.0009	0.0008	0.0172	0.0011	0.0410
8	Textiles	0.0026	0.0005	0.0009	0.0010	0.0374	0.0005	0.0011	0.0147	0.0008	0.0595
9	Pottery and jewelry	0.0187	0.0007	0.0006	0.0012	0.0145	0.0006	0.0007	0.0008	0.0010	0.0388
10	Food	0.0169	0.0008	0.0009	0.0048	0.0118	0.0006	0.0035	0.0043	0.0330	0.0765
11	Fish proc, prsv. & wholesaling	0.0077	0.0008	0.0007	0.0025	0.0043	0.0008	0.0019	0.0037	0.0225	0.0450
12	Other manufg.	0.0023	0.0006	0.0004	0.0018	0.0105	0.0007	0.0010	0.0313	0.0009	0.0495
13	Construction	0.0014	0.0009	0.0004	0.0018	0.0210	0.0005	0.0009	0.0014	0.0009	0.0293
14	Distribution	0.0051	0.0005	0.0004	0.0047	0.0025	0.0007	0.0094	0.0063	0.0050	0.0348
15	Hotels	0.0050	0.0006	0.0006	0.0047	0.0052	0.0249	0.0014	0.0014	0.0092	0.0530
16	Other accomm.	0.0052	0.0004	0.0003	0.0036	0.0042	0.0193	0.0013	0.0014	0.0073	0.0430
17	Catering	0.0062	0.0008	0.0006	0.0067	0.0059	0.0436	0.0010	0.0009	0.0124	0.0780
18	Land transport	0.0041	0.0008	0.0009	0.0030	0.0048	0.0026	0.0021	0.0026	0.0035	0.0244
19	Air transport	0.0017	0.0005	0.0006	0.0018	0.0045	0.0021	0.0008	0.0027	0.0020	0.0169
20	Sea transport	0.0025	0.0013	0.0015	0.0045	0.0087	0.0057	0.0021	0.0039	0.0056	0.0359
21	IT services & telecom.	0.0019	0.0065	0.0020	0.0061	0.0051	0.0010	0.0009	0.0010	0.0034	0.0278
22	Banking, insurance	0.0010	0.0009	0.0021	0.0025	0.0051	0.0003	0.0003	0.0003	0.0035	0.0158
23	Media	0.0037	0.0076	0.0030	0.0044	0.0083	0.0009	0.0014	0.0016	0.0053	0.0362
24	Education	0.0021	0.0073	0.0052	0.0039	0.0014	0.0020	0.0010	0.0010	0.0028	0.0267
25	Health	0.0033	0.0102	0.0076	0.0087	0.0015	0.0055	0.0008	0.0010	0.0045	0.0430
27	Other public services & admin.	0.0017	0.0022	0.0017	0.0030	0.0032	0.0046	0.0015	0.0018	0.0022	0.0218
28	Other services	0.0073	0.0032	0.0057	0.0142	0.0141	0.0096	0.0065	0.0028	0.0067	0.0701
29	Public Administration	0.0100	0.0408	0.0314	0.0395	0.0012	0.0009	0.0009	0.0008	0.0011	0.1265

* Farmers are classified as Managers and Administrators

4.5 Final Market Analysis

4.5.1 Economic activity within the Western Isles is stimulated by sales of goods and services to so-called "final demand categories". Within the SAM model, there are five main types of final demand: local government demand, central government demand, sales which add to capital stocks (GFCF), sales to tourists and finally exports. Using standard multiplier techniques, it is possible to assess the relative importance of each of these different categories in terms of generating local economic activity.

4.5.2 Table 4.5 indicates the extent to which each of the types of final demand stimulated output, factor income and employment in the Western Isles in 1997. The totals presented in the table are consistent with those in the SAM.

Table 4.5 Source of Western Isles economic activity by final market

	Output		Factor income		Employment
	£'000	%	£'000	%	FTEs	%
Local government	99109	23.2	48001	22.1	1617	16.9
Central government	94131	22.0	55891	25.8	2329	24.3
GFCF plus change in stocks	8102	1.9	3542	1.6	187	2.0
Tourist expenditure	33510	7.8	18131	8.4	1138	11.9
Exports	192836	45.1	91315	42.1	4303	44.9
Total	436015	100.0	221024	100.0	9777	100.0

4.5.3 The results clearly indicate the importance of export markets for the economy. Taking into account the various inter-sectoral and household linkages in the economy, the export market is responsible for generating 45% of the value of output produced in the economy, and 42% of total factor income, and accounts for 45% of total employment in the economy. The second most important category of final demand in terms of income and employment is central government expenditure. Tourist expenditure, whilst less important, is estimated to generate 12% of total employment in the Western Isles.

4.5.4 By combining the results presented in Table 4.5 with the occupation-employment multipliers presented earlier, it is possible to assess not only the total employment associated with each different final demand category but also the type of employment. Such analysis, known as "embodied skills analysis", can be used to indicate the labour market implications of either an increase or decrease in sales to markets which are liable to fluctuate in accordance with the macroeconomic environment.

4.5.5 Table 4.6 indicates the occupational content of sales to each final demand category. Differences in the type of employment associated with each market are very noticeable. Whilst the production of exports is responsible (directly and indirectly) for the majority of managerial occupations, craft-related jobs, plant and machine operatives and "other" occupations, local and central government demand are most important in terms of generating associate professional, clerical and secretarial employment in the Western Isles economy. The most important contribution of Western Isles tourism in terms of employment is the generation of jobs in SOC category 6 "Personal and protective occupations" where tourist expenditures are responsible for an estimated 36% of all jobs in this category in the region.

Table 4.6 Embodied skills analysis of Western Isles final demand

	Final Demand Market
	Local Govern-ment	%	Central Govern-ment	%	GFCF	%	Tourists	%	Exports	%	Total	%
1. Managers and administrators	125.2	11.4	214.6	19.6	11.4	1.0	124.4	11.4	619.2	56.6	1122.8	100
2. Professional occupations	289.4	33.5	421.6	48.8	4.9	0.6	26.7	3.1	121.8	14.1	879.5	100
3. Associate professional and technical occupations	209.5	31.7	317.6	48.0	2.7	0.4	33.8	5.1	98.1	14.8	673.7	100
4. Clerical and secretarial occupations	226.5	20.2	432.4	38.5	12.6	1.1	130.8	11.6	321.5	28.6	1150.8	100
5. Craft and related occupations	169.9	9.2	197.8	10.7	104.3	5.6	164.4	8.9	1211.8	65.6	1880.6	100
6. Personal and protective service occupations	242.5	23.8	263.2	25.8	3.4	0.3	370.0	36.3	140.7	13.8	1038.5	100
7. Sales occupations	88.9	16.1	124.6	22.6	10.8	2.0	56.9	10.3	271.2	49.1	570.7	100
8. Plant and machine operatives	99.5	11.6	129.9	15.1	28.3	3.3	56.8	6.6	544.4	63.4	879.5	100
9. Other occupations	165.5	10.7	227.3	14.7	8.3	0.5	174.6	11.3	974.5	62.9	1581.2	100
Total	1616.8	16.9	2329.0	24.3	186.7	2.0	1138.4	11.9	4303.1	44.9	9777.3	100