Monday, December 08, 2008

Loss of Big Three Would Cost Wisconsin 85,000 Jobs

A new research study from the Economic Policy Institute says that if the big three automakers go out of business it will cost Wisconsin about 85,000 jobs, and drive our unemployment rate up an additional 0.8%. Not good.

EPI is a somewhat left-leaning think tank which receives some of its funding from labor unions, and the study will undoubtedly be attacked for that reason. But the question should be if EPI's methodology is justified, and therefore if its estimates are accurate. I'm not an economist, but here's what I found when I researched the numbers.

EPI breaks job auto-industry dependent jobs into three categories: Direct, indirect, and re-spending. Direct jobs are the 123,000 people who work for the Big Three. Indirect jobs are in industries that supply parts, materials, and services to the Big Three. EPI estimates indirect jobs by looking at how much the Big Three spend on parts, materials, and services as a proportion of the total income of those industries in the US. Pretty straightforward, and EPI comes up with 650,000 indirect jobs.

Re-spending jobs are those that result from the roughly 775,000 workers in direct and indirect jobs spending their salaries. Here's where it gets trickier. EPI calculates a re-spending multiplier of 1.7; in other words, every auto-industry job results in an average of 1.7 jobs in the consumer retail and service industries. Sounds reasonable, and certainly within the range of similar economic studies, but EPI doesn't really explain how they derived it. The reference they give is to the appendix of another EPI paper that doesn't have anything to do with the specifics of the auto industry. So although the 1.7 number is probably in the ballpark, it's the easiest thing in the paper to attack because EPI did a lousy job justifying it.

Anyway, taking everything together, EPI estimates that 2.1 million US jobs will lost of the Big Three go under. And a big bunch of those jobs will be right here in Wisconsin.

If you're wondering why Republicans seem so reluctant to help US automakers, yet just a few weeks ago were tripping over themselves to throw money at banks and insurance companies, the EPI study provides a clue. Can you guess which part of the US the will be least damaged by a failure of the Big Three?

Turns out it's Washington DC...