Indirect employment

What Is Indirect Employment?

Indirect employment refers to jobs created within a supply chain that support a directly employed workforce, but are not directly involved in producing the final good or service. It falls under the broader umbrella of macroeconomics, specifically within the study of economic impact analysis. These roles arise from the demand for intermediate goods and services by businesses engaged in direct production. For example, the manufacturing of a car directly employs workers on the assembly line, but it also indirectly creates jobs for those who produce the steel, tires, and electronic components used in the car's construction.

History and Origin

The concept of indirect employment is intrinsically linked to the development of input-output analysis (I-O analysis), a macroeconomic technique that models the interdependencies between different sectors of an economy. The foundational ideas for I-O analysis can be traced back to the 17th century with Sir William Petty's work on "political arithmetick" and further developed by French economist François Quesnay's "Tableau économique" in the 18th century, which depicted the circular flow of an economy.
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However, modern input-output analysis was formalized and popularized by Russian-American economist Wassily Leontief in the 1930s and 1940s. Leontief, who later received the Nobel Memorial Prize in Economic Sciences in 1973 for his contributions, developed a system to quantitatively show how industries rely on each other for inputs and how changes in one sector ripple through the entire economy. ²²His work enabled the calculation of direct, indirect, and induced impacts of economic activities, including employment. For instance, countries began using his tables to calculate measures like gross domestic product (GDP) and industries employed the analysis to predict the effects of investments or cutbacks.
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Key Takeaways

• Indirect employment encompasses jobs generated within the supply chain that support directly employed workers.
• It is a component of the total employment impact, often analyzed using input-output models.
• These jobs are crucial for understanding the full economic footprint of an industry or project.
• Estimating indirect employment helps in policy-making and regional economic development planning.
• Limitations exist in precisely quantifying indirect employment, as models rely on various assumptions.

Formula and Calculation

The calculation of indirect employment typically relies on economic multipliers derived from input-output models. While a simple, universal formula for indirect employment itself doesn't exist independently of these models, the core principle involves applying employment multipliers to direct employment figures or changes in economic output.

The total employment impact (TEI) is often expressed as:

Where:

• (TEI) = Total Employment Impact
• (DE) = Direct Employment (jobs directly involved in production or service delivery)
• (IE) = Indirect Employment (jobs in the supply chain supporting direct employment)
• (INE) = Induced Employment (jobs created by the spending of direct and indirect employees)

Indirect employment ((IE)) is derived from the relationships within the input-output tables, which quantify the purchases industries make from other industries to produce their output. An employment multiplier indicates how many total jobs (direct, indirect, and induced) are created for each direct job or unit of output in a given sector. For instance, if a sector has an indirect employment multiplier of 0.5, it means for every direct job, an additional half-job is created indirectly within the supply chain.

Interpreting Indirect Employment

Interpreting indirect employment involves understanding its significance within the broader economic context. A high ratio of indirect to direct employment in a particular sector suggests a deeply interconnected supply chain and significant upstream economic activity. Conversely, a low ratio might indicate a sector that relies less on intermediate inputs from other domestic industries.

Economists and policymakers use these figures to assess the full scale of job creation from specific investments or industry growth. For example, a government infrastructure project not only creates direct jobs for construction workers but also indirect jobs in industries supplying construction materials like steel and concrete. ²⁰The magnitude of indirect employment can influence decisions regarding public investment and industrial policy. A greater understanding of indirect employment provides a more complete picture of an economic activity's impact beyond its immediate scope.

Hypothetical Example

Consider a new automotive manufacturing plant that directly employs 1,000 workers. This direct employment generates significant indirect employment throughout the economy.

• Step 1: Identify direct employment. The plant directly hires 1,000 individuals for assembly, quality control, and management.
• Step 2: Identify supply chain needs. To produce cars, the plant needs a multitude of components and services. For instance, it requires steel for the chassis, tires, electronic systems, paint, and transportation services.
• Step 3: Estimate indirect jobs.
  • The steel manufacturer supplying the plant hires additional workers to meet the increased demand for steel.
  • The tire factory ramps up production and employs more staff.
  • Companies producing the electronic components, glass, and interior materials also increase their workforce.
  • Logistics firms that transport these materials to the automotive plant expand their operations, hiring more drivers and warehouse personnel.

If, through an economic model, it's determined that for every direct job in automotive manufacturing, 0.8 indirect jobs are created, then the 1,000 direct jobs would generate:

(1,000 \text{ direct jobs} \times 0.8 \text{ indirect jobs/direct job} = 800 \text{ indirect jobs})

This means the new automotive plant supports an additional 800 jobs in related industries, contributing significantly to the overall labor market. This ripple effect illustrates how an investment in one sector can have far-reaching economic effects.

Practical Applications

Indirect employment figures are widely used in various economic analyses and planning initiatives.

• Government Policy and Infrastructure Projects: Governments often use estimates of direct and indirect employment to justify large-scale infrastructure projects, such as road construction or broadband expansion. The Bipartisan Infrastructure Law in the United States, for example, aimed to create millions of jobs, encompassing direct construction jobs and indirect jobs in supporting industries like manufacturing and raw material extraction.
  ¹⁶, ¹⁷, ¹⁸, ¹⁹* Economic Impact Assessments: When assessing the overall economic impact of an industry, event, or policy, analysts quantify not only the direct jobs but also the indirect and induced jobs. This provides a more comprehensive understanding of the total job creation or loss. Organizations like the Bureau of Economic Analysis (BEA) provide data and tools, such as the Regional Input-Output Modeling System (RIMS II), which help estimate these effects.
  ¹⁵* Business Investment Decisions: Companies considering new facilities or significant expansions may use indirect employment projections to understand the broader economic benefits and potential availability of a supportive supply chain workforce.
• Regional Economics and Development: Local and regional development agencies analyze indirect employment to identify key industries that have strong linkages to other sectors, making them prime targets for investment to maximize job creation across the region.
• Industry Analysis: Understanding the indirect employment generated by an industry helps in comprehending its full contribution to the economy and its reliance on various upstream sectors. For example, the manufacturing sector relies heavily on global supply chains for raw materials and parts, impacting indirect employment in those supplying sectors.
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Limitations and Criticisms

While indirect employment analysis provides valuable insights, it's essential to recognize its limitations and common criticisms.

• Model Assumptions: The calculation of indirect employment heavily relies on input-output models, which operate on assumptions such as fixed production coefficients and the availability of idle resources. ¹¹, ¹²These models may not fully account for changes in technology, market dynamics, or supply constraints that could alter the relationships between industries over time.
  ⁹, ¹⁰* Static Nature: Many I-O models are static, meaning they represent a snapshot of the economy at a specific time and may not accurately capture long-term employment effects or dynamic market responses, such as price adjustments in response to supply and demand changes.
  ⁷, ⁸* Crowding Out: Critics argue that economic stimulus or new projects may "crowd out" employment in other sectors. If resources (labor, capital) are finite, an increase in one sector might draw resources away from another, potentially leading to a shift rather than a net increase in overall employment.
  ⁵, ⁶* Data Availability and Accuracy: The accuracy of indirect employment estimates depends on the quality and timeliness of the underlying data. Comprehensive and up-to-date input-output tables are crucial, and obtaining precise data on inter-industry transactions can be challenging.
• Exaggeration of Impact: Some economic impact studies, particularly those commissioned to promote a project, may be criticized for overstating the multiplier effects and, consequently, the indirect and induced employment figures. ⁴Researchers at the W.E. Upjohn Institute for Employment Research discuss how the effectiveness of job creation initiatives varies and caution against oversimplified assessments.
  ³* Lack of Causal Inference: While I-O models show correlations and interdependencies, they do not inherently establish causation. It can be difficult to isolate the precise impact of a single economic activity on indirect employment without considering other confounding factors.

Indirect Employment vs. Induced Employment

Indirect employment and induced employment are both components of the broader concept of secondary employment within economic impact analysis, but they differ in their origin.

While indirect employment focuses on the business-to-business transactions that support direct production, induced employment arises from the subsequent spending of the wages earned by both direct and indirect employees. Both contribute to the overall multiplier effect in an economy, where an initial economic activity leads to a larger overall economic impact. ²Understanding this distinction is vital for accurate economic forecasting and policy analysis.

FAQs

How is indirect employment measured?

Indirect employment is typically measured using input-output (I-O) models, which track the flow of goods and services between different sectors of an economy. These models use multipliers to estimate how many jobs are supported in supplier industries for every unit of output or direct job in a particular sector. This quantitative approach is part of econometrics, which applies statistical methods to economic data.

Is indirect employment always positive?

Not necessarily. While new investments or increased demand can lead to positive indirect employment, economic downturns, industry closures, or supply chain disruptions can result in a reduction of indirect jobs. These negative effects can ripple through the economy, affecting multiple sectors. This is sometimes referred to as a "negative multiplier effect."

¹### What is the difference between direct, indirect, and induced employment?

• Direct employment refers to jobs directly involved in the production of a good or service.
• Indirect employment refers to jobs created in the supply chain that support the direct economic activity.
• Induced employment refers to jobs created by the spending of direct and indirect employees on goods and services in the broader economy.

All three categories contribute to the total employment impact of an economic activity, providing a holistic view of job creation. This comprehensive approach is part of total factor productivity analysis when evaluating economic output.