The Martin Luther King, Jr. Business Empowerment Center

Economic Impact Analysis

Prepared by Dr. Frank Puffer

Professor of Economics

Clark University

Introduction

The estimation of the economic impact of an organization on the economy of the county or state it is located in is in essence an attempt to determine what differences the organization has made to the economic life of its surrounding community. The task is quite similarly undertaken in that classic 1964 movie “ It’s a Wonderful Life”, which shows the impact on the community of the main character (played by James Stewart) through the device of imagining that he had never been born and then showing what would have happened as a result. An economic impact analysis takes that same idea and applies it to measurable economic effects, ordinarily changes in employment and total output.

Unfortunately, the usual economic impact analysis can’t estimate all of the economic impacts the organization has on the region since it is often extremely difficult to measure some of these impacts. For example, a college has a major impact on the economy through graduating well-informed and knowledgeable individuals who able to more easily acquire skills and make more substantial contributions to the economic and overall quality of life in the region. Likewise, a social services agency which provides an after-school sports program makes an important and long lasting contribution to the well-being of some of the young participants, but in both the college and social services case, it is extremely difficult to make a defensible numerical estimate of just how large the contribution is. As a result of these problems, the usual impact analysis confines itself to just the measurement of the economic size of the organization being studied and the multiplier effects caused by the organization’s spending and employment. These multiplier effects result from additional business being created in the surrounding community by the spending undertaken by the organization. The purchases of fuel oil, file folders, computers, and thousands of other items from local businesses stimulates additional revenue and employment for those businesses who in turn spend more themselves and thus stimulate still more business activity in other businesses in the area. The same holds for employment. The employees of the organization being studied spend their wages at least in part at local businesses and that also stimulates a chain of subsequent spending in the region. The usual economic impact analysis confines itself to estimating the total cumulative impact in both output and employment resulting from the presence of the organization.

In the case of The Martin Luther King, Jr. Business Empowerment Center (MLKJ-BEC), we can fortunately do better than this in estimating the economic impact. The nature of the mission of the MLKJ-BEC which focuses on helping the minority community of Worcester get jobs and create businesses, makes it possible to estimate not only the usual economic impact of its operation, but also the economic impact of their programs and thus allows a far more comprehensive and accurate estimate of the total economic impact than the usual more narrow analysis permits. This is a very important difference in that it allows one to see a far more complete picture of the real economic impact of the MLKJ-BEC. The rest of this document will consider in turn four aspects of the economic impact the MLKJ-BEC. The first will be the usual more traditional economic impact effects of the operation of the organization. This will be followed by three sections devoted to the economic impacts of the three main parts of the organization’s mission: The Business Incubation program, the Employment and Training program, and the Business Information Center program. Finally there will be a summary of the findings.

A brief note about underlying methodology used in the report. There are a number of different methodologies that can be used in economic impact analysis. The one used here is based on the U.S. Department of Commerce Regional Input-Output Modeling System (RIMS II), which takes advantage of very detailed knowledge of inter-industry relationships which would be prohibitively expensive for individuals to obtain on their own. The impact estimates using RIMS II tend to be more conservative than those found using simpler economic base models, but are in turn more accurate and reliable. All impacts are estimated for 2002.

The Economic Impact of the Business Empowerment Center – The Traditional approach

The economic impact of a business depends on a number of factors. The first of these is the degree to which other business or organizations in the area can provide equivalent products or services. For example, if we consider the economic impact of a new shopping mall in a city, we have to be careful not to assume that all the jobs and sales revenue at the new mall are additions to the economy. In general a substantial proportion of the new mall’s sales will come as the result of simply diverting sales from existing malls and thus represent far less of stimulus to the local economy than might otherwise be thought. The Business Empowerment Center, however, is rather unique in the Worcester region. While other organizations overlap to some extent, particularly in the area of job training and placement, the MLKJ-BEC combination of a focus on relatively underserved minority populations and a comprehensive range of services make it an organization with no obvious substitutes in the region, so it is reasonable to assume that its role is not one that could or would be quickly and easily filled in its absence. If the MLKJ-BEC did not exist, the vast majority of those it serves would not be able to obtain the services they now receive.

The route by which the traditional economic impact occurs is through the spending of the organization itself (the direct impact), the additional spending generated in the businesses that supply the organization, and the businesses that supply the businesses that supply the organization, etc. (the indirect impact), and the direct and indirect effects of spending by the employees of the organization (the induced effect). The total impact includes all of these spending effects.

Another factor which affects the magnitude of the economic impact is the size of the region. If we look at a large geographic area, the impact will also be larger since it is more likely that a greater number of the organizations suppliers will be located in the region the larger it gets. In the limit the largest economic impact will be found for the organization’s impact on the world economy since all of the suppliers would be included. The RIMS II model regions are restricted to states and counties and as a result the impacts are provided for Worcester county and Massachusetts. If one is interested in smaller regions, such as the city of Worcester, it is possible to make rough estimates based on the proportion of the organization’s employees and suppliers in the smaller region, although this is not done in this report. The final factors are the economic size of the organization and the type of activity it is engaged in. The MLKJ-BEC has attributes of a number of different types of activity. It combines real estate rental, job training, and social service activities, among others, all of which need to be taken into account in the final analysis. Once this is done, the traditional economic impact of the MLKJ-BEC for 2002 is as follows:

Worcester County ‘Traditional’ Impacts

Total Expenditure Impact      $833,000

Total Employment Impact     10 fulltime equivalent jobs

State of Massachusetts ‘Traditional’ Impacts

Total Expenditure Impact      $1,051,000

Total Employment Impact     13 fulltime equivalent jobs

In interpreting these numbers it is important to remember a few things. First, this ‘traditional’ impact has nothing to do with the success of the organization in meeting its goals. It is simply the impact of its spending. The impact of the success of its programs is measured in the following three sections. Second they represent spending and employment by the MLKJ-BEC, its suppliers, their suppliers, and the suppliers of the household needs of the MLKJ-BEC and their suppliers, ect. Roughly half of the ‘traditional’ impact is the spending and employment of the MLKJ-BEC itself. The remainder is the indirect and induced spending. Third, it should be noted that the estimated multiplier effects are small in comparison to many economic impact studies. Rather fanciful multipliers in the range of four to seven are sometimes used, but are almost certainly extremely exaggerated.

The Economic Impact of the MLKJ-BEC program – Business Incubation

The business incubation program attempts to develop new businesses by intensively supporting with a number of services. In addition to the general support, advice and guidance available to any business owner or potential owner, the incubation program provides rental space in the BEC building, office services, and a program of periodic monitoring and discussion of the activities of the business. The aim of the program is to enable potential entrepreneurs to develop their business in a supportive environment which eventually leads to complete independence.

The potential economic impact of the business incubation program would come from factors. First, the establishment of businesses that would not otherwise have come into being, second, a growth of these new businesses in excess of what would have otherwise occurred, and third, a survival rate higher than that expected of similar businesses not receiving the support of the incubation program. The first of these factors is difficult to measure. Some of the ‘incubated’ business owners may have had sufficient skills, energy, and ambition to start their business even without the help of the business incubation program. Others may have needed at least some aspects of the program support such as help raising capital, developing a business plan, ect., so that without the incubation program, the business would not have existed. While the MLKJ-BEC administration feel that all of the incubated businesses needed the program in order to start up in the first place, a more conservative assumption in keeping with this report’s generally conservative approach to the estimation of economic impact would be that perhaps a quarter of the businesses would have been established anyway. However, there seems little doubt that all of the businesses have benefited from the program services and as a result are larger – even those which would have started anyway – and healthier than would otherwise been the case.

The effect of the incubation program on the rate of the growth of the businesses is also difficult to estimate, but in the case of the businesses that would not have come into existence without the incubation program, this is not a problem since none of the employment and output would have occurred in the absence of the incubation program. For those businesses which would have been formed anyway, it is reasonable to attribute a substantial portion of their growth to the incubation program. As will be discussed shortly, the incubation program has been very effective in increasing the survival rate of its businesses and this sort of effective, positive, support no doubt is also quite helpful in supporting the expansion of the businesses as well.

The third factor affecting the economic impact of the incubation program is its effect on the survival rate of its businesses. While there is a great deal of misinformation and myth surrounding the issue of the survival rates of the newly formed businesses, it is possible to obtain a reasonably clear picture of the problem. Some of confusion about the matter is simply the result of ambiguous terminology. For example, the term ‘business failure’ may indicate quite different things to different people which quite naturally creates problems in understanding. To avoid this ambiguity we use instead the term ‘business survival rate’ which is defined as the fraction of businesses in existence at the beginning of a year that remains in business at the beginning of the following year. While the reasons for the discontinuance of a business are many lack of profitability, sickness, law suits, and retirement of the owners are just a few – we are simply concerned with the disappearance of a business regardless of the reason for closure. The data on business survival rates show that the survival rates is lowest for businesses with a small number of employees and businesses that have not been in operation for very long, both of which is typical of the businesses being incubated at the BEC, so we might expect these businesses would have rather low survival rates. Using data from Popkin’s study of business survival rates, which was done for the US Small Business Administration, as well as more recent SBA information on business death rates, one would expect that of the 28 businesses and organizations which have been part of the incubation program approximately 10 of them would not have survived to the present time. In fact, only 3 of the businesses have failed to survive. The substantial increase in survival rate is a very positive indicator of the value of the support provided by the incubation program.

The calculation of the economic impact of the MLKJ-BEC business incubation program follows the same general outline as the traditional impact estimate described in the previous section. But now we are looking at the total economic impact of that fraction of the incubated businesses’ current activities that is attributable to the business incubation program. This includes, as before, direct, indirect, and induced effects, which are estimated for both output and employment for both the county and the state.

Worcester County Business Incubation Impacts

Total Expenditure Impact      $7,501,000

Total Employment Impact     65 fulltime equivalent jobs

State of Massachusetts Business Incubation Impacts

Total Expenditure Impact      $8,945,000

Total Employment Impact     87 fulltime equivalent jobs

The Economic Impact of the MLKJ-BEC program – Training and Job Placement

The economic impact of the training and job placement programs comes from improving the skills of potential members of the work force so that they can be more productive. Whether the program is aimed at increasing skill interviewing, computer programming, or anything else, the effect in the long run will be greater economic activity in the region. To the extent the MLKJ-BEC program is responsible for the increase in individual skills, it is making a positive economic impact on the region.

A good measure of the value of the productive skills of an individual is the wage offered to him or her as an employee, or for individuals already employed, the increase in the wage offered. Using survey information collected from participants in the training and job placement programs, we can estimate the rate of success in obtaining jobs as well as the wage rate for those previously unemployed and the wage increase for those moving from one job to another. However, since we are interested in the contribution of the program, the data need to be adjusted for a number of factors.

The first factor is the rate of response of individuals to the sample. Many of those contacted are no longer in the area, but some have moved, refused to answer, were not home and didn’t call back, ect. We can estimate what results would have been for the non-respondents by using information from the respondents, taking care to allow for the likelihood that some of those who went through the training are no longer living in the region, and that those with financial difficulties are harder to track down than their more successful trainees. From the data it appears that roughly half of the successful trainees did not respond to the survey.

A second factor is that many peoples will eventually get jobs even without training programs. Some of the individuals in any program already have sufficiently high level of skills to get the job they are looking for and the program is of relatively little value to them. Others don’t develop the necessary skill level and remain unemployed, while still others benefit greatly and clearly owe their newly acquired job to what they’ve learned in the program. We assume that all of the trainees who reported getting a job, or getting a better job, benefited to some extent from the program. The precise amount is a matter of judgment. We assume that the program should get credit for about ten percent of the wage or wage increase as a measure of the increase skills and brokering function of the job placement efforts. In addition, there are a minority of trainees who have serious skill deficiencies and as a result call for a lot of effort on the part of the training staff. These are people who would very likely be not employable without the efforts of the training and job placement staff. For this group, perhaps fifteen percent of the total, the BEC should be given the full credit for their transition to the labor force.

Missing from the economic impact total is an important social impact of the training and job placement programs. Given the population being served, there is no doubt that the program results in sizeable reductions in the level of welfare and social service spending as a result of the new found self sufficiency of many of the trainees. However, this does not have the effect of increasing the economic impact of the program. Many of the MLKJ-BEC goals are socially desirable and quite important, while not falling into the narrower category of making an economic impact and it is important to realize that the economic impact is only a part of the total impact on society.

The analysis of the survey data, taking the above factors into account, shows that MLKJ-BEC contribution to the outcome of the training and job placement programs is an increase in income to people in the region of about $325,000. This does not include job placement in the MLKJ-BEC itself or in any of the incubated businesses since the economic impact of these jobs has already been counted there. Taking into account the multiplier effect in the regional economy gives the following results for the total economic impact of the job placement and training programs.

Worcester County Training and Job Placement Impacts

Total Expenditure Impact      $1,579,000

Total Employment Impact     31 fulltime equivalent jobs

State of Massachusetts Training and Job Placement Impacts

Total Expenditure Impact      $1,688,000

Total Employment Impact     35 fulltime equivalent jobs

The Economic Impact of the MLKJ-BEC program – Business Information Center

The most difficult impact to measure is that of the Business Information Center and related services. Conceptually it is measured exactly the same way as with the business incubation program, but since far more businesses and potential businesses are dealt with by the Business Information Center, it is harder to gather the detailed data that is available for the businesses in the incubation program. More importantly, it is extremely difficult to judge how much of the success of the businesses is due to the BIC and how much to other sources. Certainly many of the potential entrepreneurs who contacted the BIC and then went on start businesses would have done so without the BIC’s help. Others, just as certainly, would not have started without the support and guidance of the BIC. A substantial part of the impact of the BIC has already been accounted for in the advice and help given to the incubated businesses at the center. The impact on businesses located outside the center is probably roughly the same size as the impact of the incubated businesses, although this remains far less clear than the other impacts.

Another positive impact of the BIC that technically should not be included in the measurement of economic impact - in fact it actually reduces the economic impact! – is the saving of money and effort on the part of potential business owners who are counseled and finally convinced that they should NOT start the business they are thinking of. By helping people realize that they don’t currently have the set of skills necessary for the very demanding job of running their own business, the BIC helps avoid a lot of personal loss of money and time that would otherwise be foolishly spent trying to establish a business with very little chance of success. This saving is particularly important for the demographic group targeted by the MLKJ-BEC, who tend to have relatively low net worth and as a result will be more seriously impacted by any losses associated with getting involved with a failing business. The cumulative savings appear to be considerable. The program staff estimates that the start-ups of roughly 100 almost certain to fail businesses have been avoided with an approximately savings of around $10,000 per business. The million dollar saving for the community is very substantial, and while it doesn’t represent any additional spending in the regional economy, it certainly provides the opportunity for a more productive application for the funds.

Worcester County Business Information Center Impacts

 Total Expenditure Impact      $7,600,000

Total Employment Impact     66 fulltime equivalent jobs

 State of Massachusetts Business Information Center Impacts

 Total Expenditure Impact      $9,000,000

Total Employment Impact     88 full time equivalent jobs

 Saving to minority households resulting from discouragement of investment in poorly thought-out business ventures.               $1,000,000

Impact Summary

If we added the four components of the economic impact of the MLKJ-BEC together we get the following total impacts:

 Worcester County MLKJ-BEC Impacts

 Total Expenditure Impact      $17,513,000

Total Employment Impact     172 fulltime equivalent jobs

 State of Massachusetts MLKJ-BEC Impacts

 Total Expenditure Impact      $20,648,000

Total Employment Impact     218 fulltime equivalent jobs

 Plus savings to minority households from discouragement of investment in poorly thought-out business ventures.   $1,000,000