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What an economic impact study actually measures

In plain language: what the numbers in an economic impact study represent, how they are built, and what the standard jargon really means.

An economic impact study estimates how a project, a business, or an event ripples through a local economy. It answers a specific question: if this thing happens here, how much economic activity does it set in motion that would not have happened otherwise. The output is usually stated in jobs, output, labor income, and tax revenue.

The mechanism behind those numbers is straightforward once the jargon comes off. Money spent in a region does not stop moving. A new employer buys supplies from local vendors, those vendors pay their own suppliers and staff, and the people earning wages spend some of it at local businesses. The study traces that chain and adds it up.

Direct, indirect, and induced

Nearly every study breaks the result into three layers, and understanding them is most of what you need.

• Direct effect. The project itself. The jobs it creates and the money it spends on its own operations.
• Indirect effect. The supply chain. What the project's local suppliers produce and employ to meet its demand.
• Induced effect. The household spending. What workers, in the project and its supply chain, spend of their wages back into the local economy.

Add the three together and you have the total impact. The ratio between the total and the direct effect is the multiplier, the single most talked-about and most misunderstood number in the field.

Where the numbers can inflate

The layer that causes the most trouble is the induced effect, because it depends on an assumption about how much local income stays local. Some wages are taxed, some are saved, some are earned by people who commute in and spend elsewhere, and some are spent at businesses whose supply chains sit outside the region. Every dollar that leaves the region is a dollar that should not keep multiplying. A study that assumes full local recirculation reports a larger number than the economy will actually deliver. A careful study accounts for that leakage and states how.

What it does not measure

An impact study measures activity, not worth and not wisdom. It does not tell you whether a project is a good investment, whether it will cover its own costs, or whether the activity it creates is genuinely new rather than pulled from a business down the street. Those are separate questions, and treating a large impact number as an answer to them is the most common mistake made with these studies.

How to read one well

When you see an impact figure, ask three things: what assumptions produced it, how leakage was handled, and whether the new activity is truly additional or simply relocated. The answers tell you whether the number describes the economy or describes what the author hoped to show.