Why Incentives are Provided for Job Creation in Manufacturing
When a manufacturing company announces it’s opening a new facility in your town – investing millions in construction or retrofitting and hiring hundreds of employees – it’s exciting news. Often, such announcements include mention of significant state-provided incentives. So, why do states and municipalities offer these incentives, and what do they entail? This article provides a background on how economic development entities assess companies and the jobs they bring, to determine appropriate incentives.
Hint: Not all jobs are created equal. Some have a more significant economic impact.
For example, a company adding 200 jobs might ultimately support 400 additional jobs and drive three times the initial capital spend through local economic ripple effects.
Key Economic Terms and Concepts
To better understand these ripple effects, it’s helpful to know some basic terms used to describe both direct and indirect impacts on employment.
Basic vs. Non-Basic Jobs
Basic Jobs
Basic jobs produce goods or services for export outside the local economy.
Manufacturing jobs are often basic jobs, producing goods for a broader market.
Non-Basic Jobs
Non-basic jobs serve the local economy and rely on the income brought in by basic jobs.
Examples include retail and local services that support the resident population.
Basic jobs are critical because they generate additional economic activity, which creates more employment opportunities, as detailed below.
Employment or Jobs Multipliers
Employment multipliers estimate the total job impact in a region for each direct job created in a specific industry, i.e. the indirect and induced jobs they ultimately support. The exact formula to determine an employment multiplier is complex and beyond the scope of this article but does take into account industry, labor pool, region dynamics, and more:
Direct Jobs: These jobs are created within a specific industry as a direct result of economic activity in that sector. For example, the 200 manufacturing jobs in the example above and below.
Indirect Jobs (“Supplier Jobs”): These jobs are in industries that supply goods or services to the manufacturing company, such as raw materials, equipment, or support services.
Induced Jobs: These jobs result from the increased spending by employees in both direct and indirect jobs, generating demand in sectors like retail, hospitality, and personal services.
Related Metrics and Terms
Location Quotient
This metric measures the concentration of an industry in a specific area relative to the national average.
A location quotient greater than 1 indicates a stronger local presence of that industry, which can signify regional strength but, if too high, may also suggest overreliance on that sector.
Forward and Backward Linkages
Backward Linkages: Connections with supplier industries.
Forward Linkages: Industries that use the manufactured products as inputs.
A Practical Example
Suppose Manufacturing Company A opens a facility in your city, planning to hire 200 employees. These jobs are basic jobs, a key growth driver. With an employment multiplier of 3.0, each job creates two additional indirect or induced jobs, resulting in approximately 600 new jobs overall.
Using the 2023 median U.S. household income of $80,610, that translates to approximately $48 million in new wages within the community.
Additional benefits include:
Construction of the facility creates high-paying, temporary construction jobs.
Additional construction for warehouses, retail spaces, and housing to meet increased demand.
Expanded tax base from new warehouses, retail, and housing developments.
With this broader perspective, it becomes clearer why communities compete to attract companies like these. The impact of 200 manufacturing jobs extends well beyond one facility or one company, creating a ripple effect that benefits the entire community.
If you’re evaluating your options and curious about site selection or incentives, reach out to Modern CRE. We’re here to help.
