Thursday, May 28, 2009

How Are 3.5 Million Jobs Calculated?

The American Recovery and Reinvestment Act of 2009 is supposed to create or save roughly 3.5 million jobs. How was this estimate determined? Two documents provide the information. The first was written by Christina Romer and Jared Bernstein in January, before Barack Obama was inaugurated. It is entitled, "The Job Impact of the American Recovery and Reinvestment Plan." The second is a report prepared by the Council of Economic Advisors, of which Christian Romer is the Chair, entitled, "Estimates of Job Creation from the American Recovery and Reinvestment Act of 2009." I will rely primarily on the second report, but it relies a lot on the first report.

Probably the average citizen hears that ARRA is supposed to save or create 3.5 million jobs thinks that this means that 3.5 million people will have jobs that would not have had jobs in the absence of the program. This is not correct though. The jobs are actually job-years. Suppose a project lasts two years and results in an extra 100 people being employed. The Council of Economic Advisors is calling these 200 job-years—the 100 people are employed for two years so each person is counted twice. In my previous post, I mentioned a project in Washington that involves $1,635,000,000 to be spent over several years. The estimate for that project listed on the website is 21,255 job-years. This does not translate into 21,255 people with jobs who would not have had jobs otherwise.

There is still the question of how the 21,255 figure was determined. For this, the report provided by the Council of Economic Advisors states that they estimated that a $100 billion of government spending creates 1,085,355 job-years (p. 5). That works out to $92,136 of government spending needed to create one job-year. To use an example in the report, an $11 billion program, “…will create about 120,000 job-years during the President’s first term.” (p. 5). That is, $11,000,000,000/92000 = 11,956 or approximately 12,000 job-years. In the example above, the $1,635,000,000 project will create 17,772 job-years, which is less than the 21,255 job-years listed on the website. I do not know the reason for the difference.

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