regional economic impacts of the transportation industry1

INTERNATIONAL ECONOMICS & FINANCE JOURNAL Vol. 6, No. 2, July-December (2011) : 209-219

REGIONAL ECONOMIC IMPACTS OF THE TRANSPORTATION INDUSTRY1 Amlan Mitra*

Abstract: This paper presents the findings of a regional economic impact study of the Transportation, Distribution, and Logistics (TDL) industry in Northwest Indiana. Using a regional input-output model, the economic impacts of the TDL industry were derived. Tangible estimates of the contribution of the TDL industry in sales, jobs, earnings, value added, and tax revenue in the region are reported in the paper. Based on the study findings, public policy recommendations are made that can influence the TDL industry in Northwest Indiana through gains in freight productivity. Key words: input-output models, regional economic development, economic impact, freight transportation, transportation systems JEL Index: O18, R11, R15, R40, R58

1. INTRODUCTION The transportation, distribution, and logistics (TDL) industry is one of the most important industrial sectors in the United States. According to various estimates, the TDL industry represents from 8.5% to 20% of the nation’s gross domestic product, depending on how carefully the transportation and logistics related output is calculated from all the industrial sectors. Recently, this industry has shown strong increasing trends in employment in the transportation and wholesale/distribution sectors with a favorable comparative wage differential to other industries (Purdue University, 2003). A sponsored study by the Central Indiana Corporate Partnership (Uzsoy, 2004) found that the TDL industry plays a major role in promoting job growth in the Central Indiana region. The ability of the TDL sector to coordinate and integrate the production and delivery of goods and services from raw materials to final consumers gives cost advantages to both established and startup companies. Past researchers (Chase & Casavant, 1996; Lewis, 1991), industry experts, business community, public officials, and the general public have argued that the TDL industry is one of the most significant economic sectors for regional economic development. It is also argued that public support in the region is important for the TDL industry because it is an activity that affects the entire region. The different sub-sectors within the TDL industry depend on each other as well as on other industries, local governments and residents of all the communities in the region. *

Professor of Economics, Department of Economics and Economics, School of Management, Purdue University Calumet, Hammond, IN 46323, E-mail: [email protected]

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Economic benefits and costs related to the TDL industry virtually affect everyone in the region in one way or another. An economic impact study of the TDL industry provides tangible estimates of these economic interdependencies and a better understanding of the role and importance of the TDL industry in a region’s economy. The recent economic difficulties have revealed the structural weakness of Northwest Indiana’s economy. The manufacturing base was disproportionately affected by the economic downturns with significant job losses due to regional and global competitive advantages. Northwest Indiana is faced with the challenge to diversify its economy by reassessing the infrastructure and assets to promote economic development. The Transportation, Distribution, and Logistics (TDL) industry is one of the targeted industries, along with the advanced manufacturing and health care industries, to promote economic development through transportation investment, attracting new business, and creating new jobs in this region. The purpose of this paper is to measure the regional economic impact of the TDL industry in Northwest Indiana. 2. LITERATURE REVIEW Past economic impact studies (Brucker, Hastings & Latham, 1987; Chase, Bourque & Conway, 1987; Frechtling, 1994) reveal a standard traditional approach taken by most researchers. This traditional approach has a broad focus examining the different types of economic impacts generated by an economic activity or entity. Formally, researchers distinguish direct, indirect, and induced economic impacts. The direct impacts are the production changes in all economic sectors associated with the immediate effects of changes in output in one sector. The indirect impacts are the production changes associated with direct impacts and the induced impacts are the changes in economic activities resulting from household spending of income earned from direct and indirect impacts. The total economic impact is the sum of direct, indirect, and induced impacts. Therefore, to measure the total economic impact of the TDL industry these three impacts have to be estimated. Significance of the TDL Industry in the Regional Economy In the literature on regional economic impact studies (Chase & Casavant, 1996; Lewis, 1991), industry experts, business community, public officials, and the general public have argued that the TDL industry is one of the most significant economic sectors for regional economic development. It is also argued that public support in the region is important for the TDL industry because it is an activity that affects the entire region. The different subsectors within the TDL industry depend on each other as well as on other industries, local governments and residents of all the communities in the region. Economic benefits and costs related to the TDL industry virtually affect everyone in the region in one way or another. An economic impact study of the TDL industry provides tangible estimates of these economic interdependencies and a better understanding of the role and importance of the TDL industry in a region’s economy.

Regional Economic Impacts of the Transportation Industry

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Applications of Economic Impact Studies to the TDL Industry To evaluate the economic impacts of the changes in the activities in the TDL industry, both demand and supply changes in the TDL sector should be carefully examined. Demand changes may involve changes in population, competitiveness and consumer tastes and preferences. Supply changes may involve changes in infrastructure and public investment to support the TDL industry, technology, costs of production and the nature of the TDL goods and services provided in the region. Economic impact studies of the TDL industry may also evaluate the policies and actions which affect the TDL industry either directly and indirectly. The TDL industry is affected by many policies and actions that are outside the direct control of the TDL industry. Economic impact studies of the TDL industry can provide information to help policy makers better understand the consequences of various actions on the TDL industry as well as other sectors of the region. For example, if expansion of railroads has been opposed in some communities due to traffic congestion and accidents at railroad crossings, an economic impact study may counter these arguments with estimates of the potential gains in income and jobs in TDL industry from lower transportation cost due to expansion of its railroad infrastructure. Types of Economic Impacts in the TDL Industry There are only a few economic impact studies on the TDL industry. These studies consider the TDL industry as one of the most significant industrial sector that is capable of achieving substantial improvements in production and growth within the economy. TDL industry is primarily a service provider interdependent upon the requirements of other industries in the supply chain. Therefore, any gains in the TDL industry will gain these industries in the supply chain. TDL industry has a variety of economic impacts that are measured in terms of output, income, revenue, profits, jobs, labor earnings, and tax revenue. There is some difficulty in defining the output of the TDL industry within a regional context. In principle, the output of any industrial sector is measured by the operating revenue generated by the resources employed within the region. However, the output generated in the TDL industry primarily come from the four sub-sectors in the TDL industry (e.g. trucking, rail, air, and water) that are organized and operated across regions. The resources employed in the TDL industry are spatially mobile and not easily defined as those of a plant or a factory. The inter-regional mobility of labor and capital imply the difficulty in measuring the regional output. Therefore, an economic impact study that measures the regional output is based on some assumption of economic accounting. The output is measured by four operating revenue sources of the TDL industry. These revenue sources are from inter-regional movement of freight, exported freight movement from the region, freight movement transshipped through the region, and imported freight movement from outside and consumed in the region.

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The direct impacts within the TDL industry are from the four sub-sectors – trucking, rail, air, and water. These include gross output, the value-added, labor earnings, and jobs. Most sectors of the economy are affected by the TDL industry through the secondary impacts that are measured by using the different multipliers estimated for the TDL industry. These include total jobs multiplier, total employment multiplier, labor income multiplier, and value added multiplier. The production changes associated with immediate effects of changes in TDL industry expenditures are the direct impacts. The production changes resulting from several rounds of re-spending of the TDL industry in other industries that are supplying goods and services to the TDL industry are the indirect impacts. The changes in the economic activities resulting from household expenditures of income earned directly or indirectly from the TDL industry expenditures are induced impacts. Through the indirect and induced impacts, the TDL industry expenditures can impact virtually every sector of the economy in one way or another. The magnitude of these secondary impacts depends on the marginal propensity of expenditures of other sectors and households in the region. The final demand is measured by the households’ demand and government’s demand for TDL goods and services. 3. METHODOLOGY The logic behind input-output (I-O) models is similar to that of economic-base models. An I-O model is designed to trace the effects of changes in an economy and basically takes two forms — structural change and change in final demand. Changes in structure of the economy can be through several ways, for example, investment in transportation infrastructure. Changes in final demand are changes in household demand and government demand. The main assumptions of an I-O model are linear production technologies; constant returns to scale; homogeneous consumption functions; and price inflexibility. The standard I-O model in matrix notation is given by: Y = (I – A) X

(1)

X = (I – A)–1Y

(2)

The solution structure of (1) is X is a vector of inputs, Y is the vector demand of final demand variables, and (I–A)–1 is the matrix of interdependence coefficients. For example, in the case of a regional employment model, the elements in the (I–A)–1 matrix measure the direct and indirect employment levels from each sector of the economy to satisfy given levels of final demand. Using equation (2), the levels of employment from all sectors required to support specified levels of final demand in all sectors of the economy can be obtained. In addition, equations (1) and (2) have dynamic representations of


and,

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∆Y = (I – A)∆X

(3)

∆X = (I – A) ∆Y

(4)

–1

There is a wide range of commercially available input-output models that can be used to evaluate economic impacts of the TDL industry. They range from relatively inexpensive and fairly simple models to most sophisticated and expensive integrated input-output econometric models. The mostly widely used among these models are RIMS II, REMI, and IMPLAN. This study employs the IMPLAN model. 4. ECONOMIC IMPACT RESULTS The TDL industry wields a significant economic impact on the economy of Northwest Indiana. The total economic impact of the TDL industry in Northwest Indiana is $4.45 billion in output (value of sales), 39,555 jobs, $1.65 billion in labor income (employee compensation and proprietor income), $785.7 million in taxes, and an estimated $2.7 billion in value added consisting of employee compensation, proprietor income, indirect business taxes, and other property type income such as payments from interest, rents, royalties, dividends, and profits. Output Impact The direct output impact of the TDL industry is $3.24 billion in sales revenue. The wholesale trade sector has the largest output impact with $1.63 billion followed by the trucking sector with $903.5 million. The air, rail, water, warehousing and storage industrial sectors generated sales revenue of $2.93 million, $271 million, $3.9 million, and $124.8 million respectively. In addition to these direct output impacts, the TDL industry’s expenditures on the other industrial sectors generated $460.1 million in indirect sales. The largest indirect output impact is in the information, finance, insurance, and real estate sector (26.3%), closely followed by the manufacturing sector (26.2%), and professional, management, and administrative support services sector (24%). A more disaggregated industrial sector analysis reveals that the major indirect output impacts come from the petroleum refineries ($65.2 million) followed by real estate ($33.2 million), management of companies and enterprises ($21.9 million), and power generation and supply ($20.7 million). The total induced output impact as measured by the household expenditures is $749.7 billion. The largest percentage of the induced impact from household expenditures is in health and social services (21%) followed by the government (17%), retail trade (16%), and information, finance, and real estate (13%). When household spending of income earned directly or indirectly from the TDL industry were analyzed by disaggregating the major industrial sectors, the study found that the largest household spending is in the housing industry. About $113.5 million (15%) was spent on owner-occupied dwellings, followed by $55.6 million (7.4%) on visits to offices of physicians, dentists, and other

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health care providers, $52.5 million (7%) on hospital services, and $50.9 million (6.8%) on food services and drinking places. Job Impact The total number of jobs that are directly created by the TDL industry is 26,266 jobs. The wholesale trade sector has the largest direct employment impact with 12,409 jobs followed by the trucking sector with 7,674 jobs, and warehousing and storage with 1,596 jobs. The number of jobs created by the air, rail, and water transportation sectors combined is 1,136 jobs3. In addition to these direct jobs, the expenditures of the TDL industry on the other industrial sectors in Northwest Indiana generated 4229 indirect jobs. The largest percentage of indirect jobs created is in the professional, management, and administrative support services (40%) followed by the information, finance, insurance, and real estate (20.6%), and retail trade (10.7%). While analyzing the indirect employment impact in the three digit NAICS industries, the employment services sector benefits the most in terms of job creation from the TDL industry expenditures in that sector. Almost 8.6% of the total indirect jobs are created in companies that provide employment support services. Real estate industry, business support services, accounting and book-keeping services, restaurant and other food and drinking services employed 7.7%, 5.1%, 5%, and 4.5% of the total indirect jobs respectively. Almost 9061 additional jobs were created through the household expenditures from the wages and salaries earned in the TDL industry. The largest percentage of the induced employment impact from household expenditures is in retail trade (25%) followed by health and social services (23%), and accommodation and food services (15.3%). Jobs are mostly created in the food services and drinking places, offices of physicians and dentists, hospitals, food and beverage stores, general merchandise stores, nursing and residential care facilities, social assistance services, motor vehicle parts and dealers, automotive repair and maintenance, and real estate industry. Labor Earnings Impact The direct labor income generated from employment in the TDL industry is $1.25 billion. This includes both employee compensation (wages, salaries, and benefits) and proprietary income. The wholesale trade sector has the highest total labor income of $645.8 million followed by the trucking sector with $323.8 million. The air, rail, water, warehousing and storage industrial sectors generate labor income of $0.84 million, $100.2 million, $0.52 million, and $70.5 million respectively4. In addition to the direct labor income, the TDL industry’s expenditures on the other industrial sectors generated additional $151.7 million in indirect labor income. The largest indirect labor income impact is from professional, management, and administrative support services (40%), followed by finance, insurance, and real estate (19.6%), and the


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manufacturing sector (12.3%). Within the sub-industrial sectors, the highest percentage of indirect labor income was in the management of companies and enterprises (6.9%) followed by employment services (5.4%), postal service (4.9%), and accounting and bookkeeping services (4.8%). The induced labor earnings generated by the TDL industry in Northwest Indiana is close to $255 million. The largest percentage of induced labor earnings come from health and social services (33.7%) followed by the retail trade sector (21.2%). Disaggregated sectoral analysis shows that the highest percentage of induced labor income was generated by those who work in the offices of physicians and dentists (14.8%) followed by hospital employees (9.2%), and employees in food services and drinking places (6.8%). Value Added Impact The direct value added impact5 of the TDL industry is approximately $2 billion. The wholesale trade sector generates about $1.2 billion in value added followed by the trucking sector ($419.7 million). All other industrial sectors in the TDL industry together contribute less than $500 million in value added goods and services. The indirect value added impact due to the TDL industry’s expenditures on the other industrial sectors is $236.8 million. The largest indirect value added impact is in the professional, management, and administrative support services sector ($75.1 million), closely followed by the information, finance, insurance, and real estate sector ($68.2 million). In the sub-industrial categories under the major industrial sectors the real estate industry generated $23.4 million in added value followed by the management of companies and enterprises ($15.3 million), and power generation and supply industry ($14.5 million). The total induced value added impact as measured by the household expenditures is $465.2 million. The industry that generated the highest value added from the TDL industry is the health and social services ($96.7 million) followed by retail trade ($89.8 million). More disaggregated analysis shows that the most value added is in the owner-occupied dwellings ($90.9 million), followed by $45.3 million in offices of physicians, dentists, and other health care providers, $24.1 million in hospital services, and $20.4 million in real estate market. Tax Impact The seven counties of Northwest Indiana generated $785.73 million of federal, state, and local tax revenues from the direct, indirect, and induced activities of the TDL industry. These revenues came from personal income taxes; corporate profits taxes, property taxes from business and residential properties, sales and excise taxes, payroll taxes, and other types of state and local taxes. Multiplier Effects of the TDL Industry Output Multiplier: For every dollar increase in demand for TDL goods and services, an additional 42 cents of total output is generated through indirect and induced effects.

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Job Multiplier: For every job created in the TDL industry, an additional 0.93 job is created in other industries through indirect and induced effects. Labor Earnings Multiplier: For every dollar increase in demand for TDL goods and services, an additional 44 cents of labor earnings is generated from other industries through indirect and induced effects. Indirect Business Tax Multiplier: For every dollar increase in demand for TDL goods and services, an additional $1.06 of indirect business tax is generated from other industries through indirect and induced effects. The demand, earnings, and employment multipliers for each of the sub-sectors of the TDL industry were also calculated. The largest multiplier impact in demand is in the pipeline transportation. For each dollar increase in demand in the pipeline transportation sector yields $1.61 of total demand in the economy. Warehousing and storage sector has the largest labor earnings multiplier with $0.72 in total labor earnings from a dollar increase in demand in that sector. The mass transit and ground passenger transportation has the largest employment multiplier with about 30 jobs created per million dollar increase in demand in that sector. The TDL impact on the other industries in Northwest Indiana was also analyzed. Every million dollars of TDL demand yields about $67,558 in output (sales) in information, finance, insurance, and real estate industry, $51,828 in manufacturing, $49,191 in health and social services, , $44,084 in retail trade, $19,756 in accommodation and food services, $6,094 in the construction industry, $5,145 in educational services, and $4,545 in recreational and entertainment services. 5. PUBLIC POLICY RECOMMENDATIONS The following public policy recommendations are made based on the existing research and the results of the economic impact analysis: • •

• • •

•

More studies that directly investigate the exact nature of linkage between public policy and freight productivity are needed. Any policy changes in the transportation system should be based on beneficial substitution between the basic logistical inputs, such as transportation services, inventories and facilities. Reserved-capacity strategies for trucks should be explored. Policy makers should focus on the non-local highway system. Any policy changes in the transportation system that reduces travel time and increase travel time reliability will enable freight and other private firms to realize short-term cost savings due to lower operating costs. Policy makers should focus on alternative modes of transportation. Expansion of transportation networks in railways, waterways, and intermodal facilities are needed.


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•

Policy makers should focus on the economic rate of return for infrastructure project selection instead of the number of jobs created. • Public policies that allow logistical restructuring are beneficial. • Investment and financing policies that implement advanced informational technologies to improve freight efficiency, logistics operations, and transportation management are beneficial. • Policy makers need to finance research and development activities that provide analytical/quantitative tools and measures of public transportation improvement projects. For specific public policy recommendations, further quantitative studies are necessary on various issues of the TDL industry, such as returns on investments from transportation improvement projects, welfare gains from freight productivity due to investments in transportation infrastructure, etc. Methodological and quantitative studies should be conducted measuring both direct and indirect net benefits of public sector investments on the TDL industry. 6. CONCLUSION AND FUTURE RESEARCH DIRECTIONS Northwest Indiana residents and businesses of Northwest Indiana want to know how their money and tax dollars that are spent on transportation improvement projects are beneficial to them and the region. More specifically, they want answers to these questions: •

How does a dollar spent in the transportation, distribution, and logistics (TDL) industry benefit them and the region compared to a dollar spent in other industries? • How will their income increase for every dollar spent in the TDL industry? • How many jobs will be created in other industries for every $1 million spent in the TDL industry, compared to money spent within another industry? • Which industries have the greatest potential of generating both direct and indirect jobs? This economic impact study of the TDL industry in Northwest Indiana has provided answers to these questions and more. The study has provided quantitative estimates of the interdependence of the different modes of freight transportation, mass transit, and wholesale trade within the TDL industry and the interdependence of the TDL industry with other important industries in Northwest Indiana, such as manufacturing, construction, real estate, retail trade, health services, etc. The study recommends that the policymakers explore improvements in alternative modes of transportation, including intermodal, to make Northwest Indiana’s transportation system more efficient, secure, and reliable. Many questions still remain unanswered, such as impacts of alternative public policies on freight efficiency, reliability, and security. Additional research is needed to provide a more in-depth understanding and knowledge of

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how the TDL industry grows, what types of policies and strategies are required for future growth of this industry, and the funding requirements to implement these policies and strategies. Notes 1.

This paper is prepared from a transportation research project funded by the Indiana Department of Workforce Development, United States.

2.

This paper is prepared from a transportation research project funded by the Indiana Department of Workforce Development, United States.

3.

The direct employment impacts of air, rail, and water may be underestimated due to non-disclosure of data in the BEA, BLS, and County Business Patterns.

4.

The direct labor income impacts of air, rail, and water may be underestimated due to non-disclosure of data in the BEA, BLS, and County Business Patterns.

5.

The direct value added impacts of air, rail, and water may be underestimated due to non-disclosure of data in the BEA, BLS, and County Business Patterns.

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