New Jersey’s Connected Economy: Measuring the Ripple Effect of Economic Policy
According to Newtown’s third law of motion, for every action in nature there is an equal and opposite reaction. However, a new study undertaken by NJPRO, the New Jersey Policy Research Organization, demonstrates that that’s not the way the modern business ecosystem works, particularly in New Jersey.
Our analysis – New Jersey’s Connected Economy – shows that actions that impact New Jersey’s business environment or a specific industry, can produce far-reaching effects, positively or negatively, throughout the state due to the interconnected nature of our economy. And understanding that reality is a must for policymakers in Trenton, along with business and community leaders in New Jersey.
The NJPRO study examined the New Jersey business ecosystem with a focus on six key clusters: chemical manufacturing, food processing and manufacturing, health systems and services, information communications and technology, life sciences and tourism. Due to their long histories in New Jersey and significant size, these industry clusters all have an outsized impact on New Jersey’s economy, as our report demonstrates.
The gain or loss of a job in one of these clusters doesn’t mean an equal impact in the broader economy. For example, depending on the cluster, each job gained or lost results in between 1.6 to 4.6 jobs and $200,000 to $2.6 million in economic activity, as well as $5,000 to $30,000 in state tax revenues. These far-reaching effects in one industry can be immense.
This ripple effect, or impact on local and regional vendors in the supply chain, is especially significant when we examine the two largest clusters in the study: chemical manufacturing and life sciences. With nearly 44,000 jobs, chemical manufacturing’s average annual wage of $126,000 is nearly twice that of the private sector average. Our study found that a gain or loss of 500 jobs in that sector would mean 2,304 jobs gained or lost in the connected economy and a total impact of about $1.3 million.
The life sciences cluster in New Jersey, long known as “the medicine chest of the world,” is similarly significant, with 117,000 employees and a total payroll of around $16.5 billion annually. A gain or loss of 500 life science jobs would mean 1,651 jobs gained or lost after adding in direct, indirect and induced employment. Each job in the life sciences gained or lost is actually worth 3.3 jobs within the state economy, as well as $852,000 in economic output and $281,000 in wages.
In addition to the indirect economic impact produced by the supply chain as money flows through the procurement process, the impact on local retail activity, or “induced” economy is also affected by the health of the interconnected economy. Induced employment includes local people on Main Street, such as restaurants, retail, and service providers in the community or region where a large facility or cluster is located. As the facility or cluster grows, so does employee spending, and vice versa if the facility or cluster shrinks.
This relationship is a two-way street. In today’s economy, companies seek areas with vibrant cultural and entertainment amenities for their employees and their families. This is one of the core principles of the symbiotic nature of our connected economy.
The interconnected nature of New Jersey’s economy produces a benefit that experts call “agglomeration.” An example of agglomeration is when a cluster of companies emerges and grows, attracting other companies that want to capitalize on the success of the cluster resulting in a network of area suppliers. The attraction, development and retention of a strong workforce is also an example of agglomeration. These talented employees are critical to a specific industry, and they support additional industries within the state.
Another benefit of a thriving industry cluster is that concentration will in turn foster innovation. The more companies flourish in a state, the more innovation will emerge. In order to maintain this growth, however, the state must continue to create a favorable business climate to enable the mixing of inter-disciplinary human capital (i.e. researchers, entrepreneurs) and to facilitate the inflow of financial capital (i.e. research grants, venture capital funds).
The analyses in this report have led us to five primary conclusions.
- Policymakers should evaluate and consider the downstream impacts of changes in approaches to an industry cluster. It’s easy to think that a targeted tax or regulatory change will only impact that industry. But as demonstrated in this report, gains or losses will be felt downstream by their suppliers.
- Objectively evaluating the consequences of policy decisions is essential. All policy decisions inevitably require tradeoffs – and policies that impact business competitiveness are no different.
- Innovation is enhanced by diversity. The way to encourage innovation is to create a climate that is welcoming to a diversity of individuals, businesses, and industries. In turn the ultimate beneficiaries of innovation success are diverse individuals, businesses and industries.
- Changes to the cost structure of the supplier network or local businesses can result in reduced spending locally. In our global economy, companies have many choices on where they can source their business or grow their operations. Companies take into consideration a number of factors when considering where to locate and cost increases can encourage companies to look afar.
- State investments in talent and infrastructure make a difference. For long-standing industry clusters, state investments in talent development and infrastructure can help to reduce costs of doing business for crucial industries, making them more likely to grow and expand in New Jersey.
About The New Jersey Policy Research Organization Foundation (NJPRO)
A non-profit, non-partisan organization that produces independent research to provide the business perspective in the policy dialogue led by A.J. Sabath is Executive Director of NJPRO. NJPRO reports can be found at www.njprofoundation.org.