“As I said in my inaugural address, my first job is to make sure every Mississippian has a job.”
— Gov. Phil Bryant
State of the State Address — Jan. 24, 2012
“So we should be doing everything we can as a country to create more good jobs that pay good wages. Period.”
— President Barack Obama
Remarks at Amazon Chattanooga (Tenn.) Fulfillment Center July 30, 2013
As the above remarks by our governor and our president illustrate, it really is all about jobs, especially good jobs. If that is the case, then how much should government — local, state or federal — pay to assist in the creation of a good job?
The answer depends on a variety of circumstances and situations. Do we want jobs that have a certain economic impact? Do we want jobs that provide a return on the investment by the government? Is it ever appropriate to provide incentives when there is a negative return on investment?
In the midst of these questions it is appropriate to consider how the return on investment is calculated and phrased. Feasibility studies offer a clue to the answers to these questions. A consultant doing a feasibility study first makes a determination as to what is feasible. And guess what? Feasibility is determined by the client. If a client wants a return on investment of 12 percent, and the study shows that the return will be 15 percent then the project is deemed feasible. If the project returns 10 percent then the project is not feasible, even though the project has a positive return on investment. Sometimes a project may be feasible even if it has a negative return on the investment. For example, if a governmental entity invests more per job than will be returned financially, but results in changing the image of the state then the project would be deemed feasible if that was the goal of the state.
Enough of the generalities. Assume that as an economic developer or elected official you have a choice of two new jobs for your community. One is that of a barber, the other is that of a physician. No doubt an easy choice. You would certainly take the physician. After all, a 2008 study by a Mississippi State University economist concluded that one new doctor practicing in a Mississippi county can have an economic impact ranging from $120,000-$2 million, depending on the county. That physician would also create an average of 31 new jobs. No wonder that the Governor’s Health Care Economic Development Summit on Aug. 15, 2013, has hundreds of registrants.
And what about that job of the barber? Most barbers serve the local community. They are considered secondary employers, not primary employers, meaning that they do not bring in additional money into the local economy. But what if a celebrity barber moved into the community and brought in customers from all over the world? What if that barber had to hire 40 other barbers to keep up with demand? And what if that barber put the community on the international map? And what if the economic impact of that barber shop was estimated to be $1.2 million? OK, it’s an absurd example. However, it illustrates that in order to do economic forecasts about jobs that certain assumptions have to be made. And therein lies the challenge in estimating the value of a job.
Also, form an economic standpoint all jobs are not created equal. Kentucky’s economic development organization provides a good example of the value of jobs by occupational sector. It shows, for example that adding 100 new jobs in the manufacturing sector has a direct economic impact of $12,072,000, while adding 100 new jobs in the retail trade sector has a direct economic impact of $4,375,000. Check out the website at www.thinkkentucky.com/kyedc/pdfs/100jobs.pdf.
Economic impact software such as IMPLAN (IMpact Analysis for PLANning) and REMI (Regional Economic Models, Inc.) are routinely used by those making economic impact studies.
There seems to be no shortage economic impact studies related to job creation and legislation. For example, in the Summer 2013 edition of the Rand Review there are synopses of studies regarding the Affordable Care Act. One states that under the Affordable Care Act the State of Arkansas will see 6,200 new jobs and $550 million “… in net economic growth, accounting for subsidies, Medicaid expansion, taxes and Medicare cuts.” Another states that Pennsylvania will have 35,000 jobs “…retained by economic growth stemming from Medicaid expansion,” and that there will be $3.5 billion in “…net economic growth for the state, accounting for subsidies, Medicaid expansion, taxes and Medicare cuts.”
In summary, the value of a new job to a community depends on many things. Calculating the value of that job depends on the assumptions made about the job and its effects. Fortunately, for those making the investment through tax incentives, infrastructure improvements, grants, etc. there are tools for evaluation.
Phil Hardwick is coordinator of capacity development at the John C. Stennis Institute of Government. Pease contact Hardwick at email@example.com.