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6 Common Economic Modeling Mistakes (And How to Fix Them)

May 9, 2018 by Nasera Kaouss

Mistakes, we all make them. What if I told you that I could help you not make them? You’d probably be pretty happy, right? IMPLAN is a very useful tool and is easy to use when you know what all the terminology means. Luckily for you, IMPLAN offers a help desk where previous customers have probably asked the same questions that you may have. If not, it also allows you to post any questions and get a response. But in the interest of ease, here are a few of the common issues that IMPLAN users face and how to address them:

1. Construction and Operation

Oftentimes when customers try to run an impact analysis on a region that may have experienced a lot of construction work, they will want to include it; however, it has to be done using the right terminology. When adding an event, it is important to create a distinction between construction and operation. IMPLAN defines construction as a temporary event that imports workers and creates a temporary spending pattern. This translates to your ACTUAL construction workers in “real world” terms. Operation refers to a permanent event that has generated new jobs and new spending patterns. This is an example of the result of the construction. So once a new building is built, operation would refer to the new workers that work there and also would refer to how they are going to contribute to the economy in that region.

2. Employment and Compensation

When calculating employment, IMPLAN follows the U.S. Bureau of Economic Analysis (BEA). This allows the data to take into account all types of workers (part-time, seasonal, and full-time). The BEA has released a list of coefficients that are used to adjust for all workers. It is important to remember that the number of jobs that will be entered into the model is equal to the total full time employment divided by the coefficient provided. This will give you a larger number than you started off with, but it includes all of your workers. It is also imperative to calculate the “new” number of jobs separately before doing anything in the model.

When calculating employee compensation, it is important to include benefits to calculate the total compensation. If a customer already has that value calculated, then that value can be directly inputted into the model. However, if this value has not yet been calculated, IMPLAN makes the calculations very simple. The total wage and salary of all the employees can be multiplied by the Employee Compensation per Wage Income and Salary coefficient provided by the BEA. This will add in the monetary value of benefits and give a value that is equal to total compensation.

3. Accounting for Inflation

When doing basic calculations and inputting these values into IMPLAN, most of us forget about taking inflation into account. This one made the list because it’s not everyday that you’re doing calculations for another year, unless you’re an economist. Luckily, accounting for inflation is very simply done in the model. When you get to the final page that gives you the impact summary, all you have to do is adjust the monetary year to match your data year. This will adjust for inflation and give you more accurate results.

4. Analyzing the Impact Summary

When analyzing the Impact Summary, sometimes the terminology can get confusing and cause people to double count their values. Misunderstanding the summary results will most definitely give an inaccurate reading of all estimates that the model has run. Remember that the total impact in that region should be equivalent to the output value. Some might think that they should go ahead and add up all the values across the rows to essentially calculate the “total” impact, but instead that will give a large number due to double counting.

5. Labor Income

Many users are alarmed when they see the value of their labor income, because it is either too high or too low. The reason for this is often that the proprietor income is not adequately adjusted. When inputting the value for employee compensation, the results will be more accurate when you add in a value for proprietor income. When an input value is not supplied by the user, IMPLAN calculates a rough estimate. This calculation is done by averaging corporate and self-employment compensation. It is essential to adjust for the proper proprietor income to get an accurate estimate for labor income.

6. Accounting for Headquarters

When running an impact to calculate the impact of moving or building a headquarters in a different region, customers will often choose the sector in which that company falls into. The issue with this is that it just accounts for all of the spending patterns that the specific sector is for and not for a headquarters. IMPLAN has a specific sector (IMPLAN Sector 461) which is for headquarters. This is a more accurate representation of how a headquarters will impact the region.

Wrapping it up 

You’ve probably noticed that many of the common mistakes which made the list are related to terminology rather than user error. Learning new terminology can be taxing and hard sometimes. IMPLAN offers resources that can help lighten the burden like the glossary. This defines terms that are seen all throughout the model, and there’s help for everything else too. IMPLAN also offers support to help you with any issues that you might run into. However it seems to be that if you can remember how to avoid these few common mistakes, then your next impact analysis just might run a lot more smoothly.

Topics: Data, Economics, Employment


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