General Motors (GM) recently announced a shutdown of five plants in North America, laying off about 14,000 workers (including 8,000 white-collar jobs). Gamil Aljohaim, owner of a gas station across the highway from the affected Detroit-Hamtramck assembly plant, expects this to cause a large falloff in his sales. But this action by GM will have a much broader effect on the economy as a whole.
The auto industry is particularly important to the U.S. economy. Economists have shown that this industry supports more than 7 million private sector jobs in the U.S. economy. Overall, the industry is responsible for $500 billion in income to workers. The direct effect of a change in employment (or income) is the initial shock to a base industry or firm (in this case, GM). This initial shock then has a multiplier effect which ripples throughout the local or national economy. “It is estimated that for every job in the automobile industry there are ripple effects that impact seven to nine jobs,” said Marick Masters, a business professor at Wayne State University. “Furthermore, an automotive assembly job has one of the highest multipliers of any job.”
This multiplier effect arises from the lost employment (or income) in other businesses which rely on the income of autoworkers (such as neighborhood grocery stores, entertainment). Aljohaim’s loss of business in his gas station is such an indirect effect. The total effect is the sum of the direct and indirect effects, here estimated to be about seven-to-nine times the initial shock. The 1,500 lost jobs at the Detroit-Hamtramck plant is expected to have a total effect of about 10,000 lost jobs in the Detroit region.
Obviously, this base-multiplier effect is similar to the traditional Keynesian multiplier process in macroeconomics. The only difference is that this economic base model is typically applied at the regional, rather than national, level.