5. Multiplier Analysis 

5.1 Introduction 

5.1.1 This chapter begins by reporting the values of various multipliers which can be produced from 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.

 

5.1.2 Four different types of multipliers are presented:

§ Open IO or Type 1 output multipliers, which measure the effect of a change in final demand (e.g. an increase in export demand) for one sector on the output of the whole economy; taking into account the inter-sectoral purchases of input goods and services.

§ SAM output multipliers, which in addition, take into account the distribution of income and the spending behaviour of local households as more (or less) income is available as a result of the initial injection

§ SAM household multipliers, which measure the total effect of a unit change in income of a particular household type on the incomes of all households in the economy.

§ Employment multipliers, which measure the total number of jobs created in the economy as a result of an increase of employment in one sector. In addition, employment effects are presented which 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.

 

5.1.3 The multiplier analysis is useful for identifying the extent to which different sectors and households have the potential to generate income and employment in the economy as a whole. The chapter concludes by considering the extent to which the economy is dependent on different types of final demand – local government demand, central government demand, Gross Fixed Capital Formation and exports.  The results of this so-called final market analysis are contrasted with those found in analysis of the 1997 SAM.

5.2 Sectoral multipliers

5.2.1 Two types of ‘output’ multipliers are shown in Table 5.1.  The first, “open IO” or basic (Type 1) multipliers show 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.

5.2.2 The largest open output multiplier in the Western Isles economy is possessed by food and drink manufacturing and processing, at a value of 1.577. Therefore, a £1000 increase in demand for output from Western Isles food and drink manufacturers and processors is estimated to generate an additional £577 in the output of all sectors of the local economy, as the businesses within this sector increase their demand for inputs and services in the Western Isles economy. A decline of £1000 in the value of demand for food and drink products has an equally large but negative effect on the Western Isles economy.

5.2.3 The next largest multipliers are possessed by Sea Fishing (1.55), Media (1.51), Agriculture (1.41) and Fish Processing, Preserving and Wholesaling (1.40).  The same five sectors were found to have the highest IO multiplier values in the 1997 study of the region although the rank position of the sectors has changed.

5.2.4 Six sectors have open IO multipliers lower than 1.1.  These are all service sectors reflecting the fact that these sectors purchase few or no inputs. The results thus 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. In general the multipliers are all fairly low as expected, given the open nature of the Western Isles economy.

 

Table 5.1 Open IO and SAM output multipliers, 2003

	Industry	Open IO  (Type 1)	Rank	SAM	Rank
1	Agriculture	1.412	4	1.494	8
2,3,5	Sea fishing	1.550	2	1.739	2
4	Fish farming	1.140	16	1.382	12
6	Electricity, gas, water	1.300	8	1.450	9
7	Extraction (of ores, crude petrol etc.)	1.256	9	1.519	6
8	Textiles	1.342	7	1.512	7
9	Pottery and jewellery	1.113	19	1.291	23
10	Food and drink manuf. & processing	1.577	1	1.742	1
11	Fish process., preserving, wholesaling	1.404	5	1.646	4
12	Other manufacturing	1.111	20	1.294	22
13	Construction	1.179	14	1.350	15
14	Distribution	1.128	17	1.324	16
15	Hotels	1.225	10	1.406	11
16	Other accommodation	1.211	11	1.313	18
17	Catering	1.026	24	1.283	24
18	Land transport	1.127	18	1.376	13
19	Air transport	1.352	6	1.577	5
20	Sea transport	1.170	15	1.351	14
21	IT services and telecommunications	1.192	13	1.432	10
22	Banking and Insurance	1.042	23	1.123	26
23	Media	1.514	3	1.708	3
24	Education	1.069	21	1.230	25
25	Health	1.059	22	1.298	19
27	Other public services	1.204	12	1.317	17
28	Other services	1.007	25	1.297	21
29	Public administration	1.000	26	1.298	20

 

 

 

 

5.2.5 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.

5.2.6 The second column of multipliers in Table 5.1 shows the values of these SAM multipliers.  Again food and drink processing has the largest multiplier value of 1.742. In other words a £1000 increase in demand for output from the Food and Drink Processing sector is estimated to generate an additional £742 in the output of all sectors of the local economy.  In the case of the SAM model, this comes about partly as a result of increased demand for inputs and services in the Western Isles economy and partly because some of the extra wages, salaries and profits of those working in all sectors affected is spent within the region. The Food and Drink Processing sector is followed by largely the same group of sectors as in the open input output multiplier case although Agriculture slips lower down the rank position reflecting the low wages and salaries of this sector and those most closely linked to it.

5.2.7 The lowest SAM multiplier value belongs to banking and insurance at 1.123. Many of the other service sectors perform much better when SAM multipliers are considered rather than IO multipliers because the 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.

5.2.8 Table 5.2 compares the magnitude of SAM multipliers and the rank positions of sectors (as estimated from the 2003 SAM) to those found in the 1997 study.  The table indicates that the magnitude of multipliers has decreased over the period.  There are four factors which may have lead to this finding:  changes in production technology reducing dependence on local inputs and local labour; decreased reliance on local suppliers and increased use of imports and/or non-local labourers in production; changes in household preferences in terms of expenditure; and change in the source of household expenditure so that more is purchased from non local sources.

5.2.9 Although there have been changes in the rank position of sectors, these changes are in the majority of cases limited to increases or decreases of one or four places within the ranks.  The one exception indicated in Table 5.2 is that of the education sector which has fallen from 17th position in 1997 to 25th position in 2003.

 

Table 5.2 Changes in rank position of sectors with highest and lowest SAM multipliers

	Industry	2003 SAM multipliers	Rank			1997 SAM multipliers	Rank	Change in rank positions
	Top 5, 2003
10	Food and drink processing	1.742	1	1.968			3	2
2	Sea fishing	1.739	2	1.907			4	2
23	Media	1.708	3	1.786			5	2
11	Fish processing	1.646	4	1.983			2	-2
19	Air transport	1.577	5	1.517			9	4
	Bottom 5,  2003
12	Other manufacturing	1.294	22		1.350		25	3
9	Pottery and jewellery	1.290	23		1.351		24	1
17	Catering	1.283	24		1.379		21	-3
24	Education	1.230	25		1.406		17	-8
22	Banking and Insurance	1.123	26		1.146		26	0

 

5.3 Household multipliers

5.3.1  The SAM household multipliers shown in Table 5.3 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.

5.3.2  As in the 1997 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) would result in an additional £205 increase in total Western Isles household income. This £205 increase mainly accrues to households without children, and, to a lesser extent, households with children: even though neither of these household types benefit directly from the injection, they benefit through the economic activity stimulated by the injection.

5.3.3  As was the case with the output multipliers, the magnitude of the SAM household multiplier is shown to have decreased between 1997 and 2003 as a result of a combination of factors.  The most important in the case of the household multipliers will probably be changes in the consumption and sourcing patterns of households in the region.

 

Table 5.3 SAM household multipliers, Western Isles 2003

	Injection to:
Impact on:	Adults, no dependants	Adults plus dependants	Retired
Adults, no dependants	1.088	0.090	0.118
Adults plus dependants	0.064	1.068	0.084
Retired	0.002	0.005	1.003
Total multiplier, 2003	1.154	1.163	1.205
Total multiplier, 1997	1.194	1.203	1.238
Difference	-0.040	-0.040	-0.033

  

5.4 Employment effects and employment multipliers

5.4.1   The employment effects arising from a policy change or stimulus to an economy are often considered critical.  Table 5.4 presents various measures associated with employment.  The first column of figures ‘employment coefficients’ measure the amount of employment (measured in full-time equivalents, ‘FTEs’) required per unit output of each sector. As shown, the highest value is given by public administration, with 0.092 FTE jobs required per £1000 of own “output”. This is followed by other private services and other manufacturing.

5.4.2  Perhaps more interestingly, 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. These exceed the values of the employment coefficients, since inter-industry links are taken into account. For example, sea fishing has an employment effect of 0.053, indicating that a £1000 increase in final demand for sea fish output leads to a total increase in Western Isles employment of 0.053 FTEs or alternatively a £1 million increase in such final demand leads to 53 additional jobs, some of which will be in the sea fish sector, others elsewhere in the economy.  Arguably, employment effects are the most useful measures from a policy perspective in assessing the potential of a sector to generate knock-on-benefits in the economy as a whole.

 

5.4.3  Employment multipliers measure the increase in total employment resulting from a unit increase in employment in one particular sector. The final columns of Table 5.4 show that the highest values, with over 2 FTE jobs generated for every one in the initial sector, are shown by other public services, fish processing, and air transport. All these sectors have quite low employment coefficients thus it follows that for a whole extra job to be created in these sectors, the boost to the economy has to be significant and strong economy-wide employment benefits follow.

 

 

Table  5.4  Employment coefficients, effects and multipliers, Western Isles 2003

		Employment Coefficients*		Employment Effects**		Employment Multipliers ***
		value	rank	value	rank	value	rank
1	Agriculture	0.015	20	0.025	20	1.658	7
2,3,5	Sea fishing	0.037	5	0.053	3	1.431	10
4	Fish farming	0.009	25	0.017	24	1.796	4
6	Electricity, gas, water	0.021	13	0.030	14	1.439	9
7	Extraction, ( of ore, petroleum etc)	0.031	8	0.041	8	1.309	16
8	Textiles	0.037	4	0.051	4	1.381	12
9	Pottery and jewellery	0.030	9	0.035	10	1.186	22
10	Food manuf. & proc’g	0.031	7	0.044	6	1.407	11
11	Fish proc’g, prsv’g,whol’g	0.014	21	0.031	13	2.242	2
12	Other manufacturing	0.040	3	0.046	5	1.138	24
13	Construction	0.030	10	0.037	9	1.243	19
14	Distribution	0.020	15	0.027	16	1.341	14
15	Hotels	0.021	12	0.029	15	1.343	13
16	Other accommodation	0.019	17	0.025	19	1.333	15
17	Catering	0.035	6	0.041	7	1.152	23
18	Land transport	0.012	23	0.019	23	1.639	6
19	Air transport	0.012	22	0.026	17	2.122	3
20	Sea transport	0.020	14	0.026	18	1.273	18
21	IT services and telecoms	0.015	19	0.024	21	1.550	8
22	Banking and insurance	0.010	24	0.012	26	1.205	20
23	Media