The Impact of ARRA Funds on Employment

Yesterday the administration presented a report on the use of funds available to Puerto Rico under the American Recovery and Reinvestment Act (“ARRA”).  To date, Puerto Rico has spent $1.2 billion in ARRA funds, which have generated 1,600 jobs.  Thus, according to official statistics, 1.33 jobs have been created for every $1 million of ARRA funds spent so far.  We suspect this job multiplier is rather low and perhaps not an accurate reflection of the real impact of these expenditures on the local economy.

Although it is not clear from press reports, we assume the number of jobs created includes direct, indirect, and induced jobs.  To explain these concepts let’s assume the government has funded the construction of a new highway.  Direct employment generated by this investment refers to employment directly related to the construction of the highway, that is, to people hired directly by the construction company to work on the construction of the new highway.  As a result of this direct employment, jobs are also generated in the businesses that supply goods and services (cement manufacturers, rebar makers, asphalt producers etc.) to the construction company.  These jobs are referred to as indirect employment.  Finally, when these directly and indirectly generated incomes are spent on a variety of items in the broader economy (e.g. food, clothing, entertainment, etc.), it gives rise to induced employment effects in those other sectors of the economy.

The federal government has calculated that 10.87 direct, indirect, and induced jobs are created for every $1 million of ARRA funds spent in the mainland United States.  The lower job multiplier effect for Puerto Rico could be explained by the large amount of imported goods we consume.  In Puerto Rico approximately 80 to 85% of everything we consume is imported, while in the U.S. only about 17 to 18% of all goods and services are imported.  This means the actual impact on employment in Puerto Rico of every $1 million spent from the stimulus package will be significantly lower than in the mainland U.S. because a considerably larger amount of what we will buy with those funds comes from abroad.  In simple terms, ARRA funds spent in Puerto Rico generate relatively more demand for foreign, instead of local, labor, therefore generating activity that has only a modest impact on the local economy.

Setting aside the technicalities, the question remains of whether the expenditure of ARRA funds will provide a sufficiently strong stimulus to jumpstart the Puerto Rico economy.  The answer, up to now, appears to be no.  In Puerto Rico we have lost 67,000 jobs between January and September of the current year.  That averages out to 7,444 jobs lost every month.  Looking at it in another way, Puerto Rico needs to create an average of 7,444 new jobs per month just to keep even with average monthly job losses.  The 1,600 new jobs created through the expenditure of ARRA funds substitute only for jobs lost during 6.4 days of the current year.

In sum, as we have stated before while spending ARRA funds will do some good, these expenditures are not sufficient to pull us out of the economic quagmire we are in.   We  need to do more, much more, to jumpstart the economy in the short term and still quite a lot more in structural terms to sustain that growth over the long term.

This entry was posted on Wednesday, October 21st, 2009 at 1:05 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.