Local Multipliers

Every time a local economy generates a new job by attracting a new business, additional jobs might also be created, mainly through increased demand for local goods and services. This positive effect on employment is partially offset by general equilibrium effects induced by changes in local wages and prices of local services. In this paper, I estimate the long-term employment multiplier at the local level. Specifically, I quantify the long-term change in the number of jobs in a city’s tradable and nontradable sectors generated by an exogenous increase in the number of jobs in the tradable sector, allowing for the endogenous reallocation of factors and adjustment of prices. I find that for each additional job in manufacturing in a given city, 1.6 jobs are created in the nontradable sector in the same city. As the number of workers and the equilibrium wage increase in a city, the demand for local goods and services increases. This effect is significantly larger for skilled jobs, because they command higher earnings. Adding one additional skilled job in the tradable sector generates 2.5 jobs in local goods and services. The corresponding figure for unskilled jobs is one. The multiplier also varies across industries. Industry-specific multipliers indicate that high tech industries have the largest multiplier. A simple framework suggests that the local multiplier for the tradable sector should be smaller than the one for the nontradable sector, and possibly even negative. This is because the increase in labor costs generated by the initial labor demand shock hurts local producers of tradables. This negative effect may be in part offset by agglomeration externalities, if they exist, and an increase in the demand for intermediate inputs, if supply chains are localized. Empirically, I find that adding one additional job in one part of the tradable sector has no significant effect on employment in other parts of the tradable sector. Local Multipliers