Traditional Economic Impact Analysis of Universities
One way to conceptualize the local economic impact of a university is to focus on the contributions the university makes to the productive capacity of the local economy (the “supply side”). A university provides educated and skilled labor to the local workforce and contributes to the knowledge and technology of local businesses through faculty research and consulting. An alternative way a university impacts the local economy is through its operating expenditures (the “demand side”). The operations of a university require expenditures for a variety of goods and services—from equipment purchases to building maintenance to meals for students. Universities are themselves large employers of faculty and staff. This directly contributes to local employment and income, and it does so indirectly when university employees spend a portion of their incomes on locally produced goods and services. Universities also bring in students and visitors from outside the local area who then also purchase goods and services. In a traditional economic impact analysis of a university, an attempt is made to measure the effects of all these university and university-related expenditures on local employment and income.
Estimates of the impacts of a university on the local economy are not limited to the direct jobs and incomes provided by the university or the jobs and incomes supported among first-tier suppliers of goods and services to the university, its employees, and students. The estimated impacts also include so-called multiplier effects that arise when first-tier suppliers place upstream demands on other producers, when workers directly or indirectly associated with business operations spend a portion of their incomes in the local economy, and when state and local governments spend new tax revenues. Estimates of multiplier effects are made using an “input-output” model—a system of linear equations that describes the interindustry relationships in an economy. IMPLAN is a commercially available input-output model that is widely used in university economic impact studies.
In university economic impact analysis, a distinction is made between the gross impacts of a university and its net impacts. Gross impacts are based on the total local expenditures of the university, its employees, and students. Net impacts are based only on expenditures that would not have occurred if the university did not exist. Examples of expenditures that are excluded in a net economic impact analysis are: (1) university operating expenditures financed from state government appropriations, as these funds may have been spent on other local public goods or by taxpayers; (2) spending by students who would have remained in the local area even if the university did not exist, either working or attending another institution; (3) expenditures by a university hospital treating patients that otherwise would have received treatment at another local health care facility. Economic impact studies that attempt to measure the net impact of a university often restrict their analysis to university operating expenditures that can be financed from nonlocal sources such as federal research grants, tuition received from nonlocal students, and philanthropic support from nonlocal alumni.
Traditional economic impact analysis provides an estimate of the value of the resources or inputs needed to produce both the services of the university and the goods and services purchased by its students and employees. The estimated impacts give an indication of how much larger the local economy is because of the university. These impacts do not necessarily represent gains in employment or income that are realized by the local population. An increase in the demand for labor brought about by a university may be satisfied in large part by an in-migration of workers and their families. In the case of university faculty, these highly educated workers are drawn almost exclusively from outside the local area. Original owners of land and property may be the group that realizes the largest wealth gains from the presence of a university.
Blackwell, M., S. Cobb, and D. Weinberg, “The Economic Impact of Educational Institutions: Issues and Methodology,” Economic Development Quarterly 16 (February 2002): 88-95.
This paper provides a clear exposition of the primary elements in a proper application of economic impact analysis to a college or university. The authors illustrate their main points using results from a case study of the impact of Xavier University on the economy of the Cincinnati metro area. There are two elements in a traditional economic impact study: (1) measurement of contributions to local economic activity from operational expenditures made by the educational institution that are funded from nonlocal sources, including federal research grants, tuition received from nonlocal students, and philanthropic support from nonlocal alumni; and (2) measurement of impacts that arise from spending from local sources that would have occurred outside the study area had the institution not existed, including impacts from the spending of local students who otherwise would have attended a college or university outside of the local area. A third less common but potentially significant component in economic impact studies of a college or university is the institution’s contribution to the stock of human capital in the local area. Measures of this impact can be developed from an estimate of the discounted value of the per student lifetime earnings premium made possible by attending the educational institution multiplied by an estimate of the number of graduates who chose to reside and work in the local area after graduation.
Siegfried, J., A. Sanderson, and P. McHenry, “The Economic Impact of Colleges and Universities,” Economics of Education Review (October 2007): 546-558.
Hoping to raise the standards of economic impact analysis, the authors review 138 economic impact studies done since 1992 to document the frequent use of suspect methodologies and assumptions that serve to exaggerate the size of university impacts on the local economy. The authors provide a number of specific suggestions on how to avoid making mistakes in economic impact calculations that can bias the results. Among the suggestions are (1) do not count as first-round expenditures those that would have been made even if the university did not exist; important examples include expenditures of university hospitals made in the treatment of patients who would have received treatment at another local health care facility if the university hospital did not exist, and the spending of students who would have attended another local institution if the university in question did not exist; (2) be explicit about the geography of the study area and base both the size of multipliers and the amount of new direct spending from exports and import substitution on those geographic boundaries; and (3) choose multipliers that are appropriate for the specific expenditure in question—expenditures on equipment made outside of the local area, for example, should have a zero multiplier. The authors also caution university officials who disseminate the results of economic impact studies to refrain from presenting the results in a misleading way. For example, a common but misleading presentation technique is to divide a dollar estimate of the total economic impact of the university by the dollar amount of appropriations received from the state and report that ratio as a return on investment for the state. These kinds of calculations yield returns that are orders of magnitude higher than those on other private and public investments. The interpretation as a return on investment assumes that the (often relatively small) state appropriations are critical for the survival of the university and that all other sources of funding would go away without the appropriations.
Selected Recent Studies
Anderson Economic Group, “Empowering Michigan: 11th Edition of the University Research Corridor Economic Impact Report,” September 2018.
The 11th in a series of annual reports prepared by the Anderson Economic Group details the economic impact on the state of Michigan of the collective operations of Michigan State University, the University of Michigan, and Wayne State University. Impacts estimated are those associated with the operations of the universities and the spending of students, including contributions to local human capital as measured by the incremental earnings of alumni living in the state. The authors strive in their analysis to identify the net economic impact of the three universities—the economic activity that would not otherwise occur without the three universities. For example, in tabulating impacts from student spending, the authors exclude expenditures by students who likely would have attended another local college if the three universities did not exist. In counting as net economic impact the earnings of alumni working in the state, the authors subtract from actual earnings an estimate of what these alumni would have earned had they not attended one of the three universities.
Appleseed, “The Economic Impact of New York University,” January 2015.
This report provides estimates of the economic impact of New York University on the city of New York and New York state. The analysis covers the operations of the Washington Square Campus and the School of Engineering but excludes the NYU Langone Medical Center. The economic impact analysis in the report is a standard application of the IMPLAN input-output model to the operational and construction expenditures of the university and the off-campus spending of NYU students. The report also contains descriptive statistics on student enrollments by school and permanent place of residence, licensing income and patents from technology transfers, and examples of New York City companies started by NYU faculty and alumni.
Appleseed, “Education, Innovation and Opportunity: The Economic Impact of Princeton University,” October 2016.
Estimates are presented of the economic impact that Princeton University has on the local area and the state of New Jersey through its purchases of goods and services, its payroll, the off-campus spending of students, and the spending of outside visitors. Estimates of total impacts, including multiplier effects, are made using IMPLAN. The report lists some of the major research programs underway at the university, including programs in neuroscience and nuclear fusion and efforts to develop mid-infrared sensor systems that can detect trace elements of hazardous chemicals in the air and soil. The report provides basic statistics on university technology transfer (patents received, number of licensing agreements, etc.), and details the ways in which the university supports student entrepreneurship.
Beacon Economics, “The University of California Systemwide Economic, Fiscal, and Social Impact Analysis,” January 2021.
This report presents the findings of a study of the economic impact on the state of California of the operations of the ten University of California campuses, including the operations of affiliated health centers and teaching hospitals. The authors use IMPLAN to estimate the direct and indirect effects of university spending on construction and operations and the nontuition spending of UC students. The report also provides a variety of economic information on UC alumni—where they live, in what industry they work, and how much they earn compared to other California residents who either do not have a bachelor’s degree or have a degree from a non-UC institution.
Economic and Public Policy Research Group, “FY18 University of Massachusetts Economic Contribution Analysis,” UMass Donahue Institute, February 2020.
A standard economic impact analysis is provided of the effects of operations at each of the five University of Massachusetts campuses (Amherst, Boston, Dartmouth, Lowell, and the UMass Medical School) on the state of Massachusetts. Impacts are calculated using IMPLAN and are based on the expenditures of the university on construction, purchases of goods and services, and payroll as well as the nontuition expenditures of UMass students.