About that Second Amazon HQ Location

This morning, Amazon announced its intention to build a second headquarters. Purported to produce “as many as 50,000 high-paying jobs,” it’s…kind of a big deal.

Every region that ends up bidding for the shiny new “AMZN HQ2” will hope to reap the rewards of the high-tech job multiplier effect. For those who might not understand the multiplier effect, let’s walk through it.

Before we can make sense of the multiplier effect, we must become familiar with the components that get multipliedThe following hypothetical will help illustrate these components: 

Try and visualize a classroom where the door is locked and ten students are inside. Each student has ten crisp one dollar bills. The math is easy: there are 100 $1 bills inside the room. Now, imagine that each student had a good or service that they could “sell” to the other nine in the room. No matter what combination of commerce and bartering takes place, the total number of dollar bills in the room will remain the same. 

Until the door opens, the room’s “economy” will not grow.

Now let’s imagine that the door is unlocked. Some students might continue to limit the sale of their goods or services to their nine fellow classmates. Others, however, might have a product that they can sell to their classmates and students from other classrooms. Contrary to the locked-door scenario, an open-door policy allows transactions conducted by the latter group to increase the total amount of money within the classroom.

In the locked-door scenario, wealth can only be circulated and redistributed. When the door is open to other classrooms’ firms, wealth can be generated.

The same is true for a regional economy. The jobs that bring in money from elsewhere are the ones that grow a region’s economy. If Coca-Cola was only ever consumed by residents of the Atlanta metro area, the beverage company would amount to little more than a mom-and-pop…no pun intended. However, we know that’s not the case: every 12-pack and 2-liter of Sprite or Coke consumed worldwide—from Manchester to Memphis—represents a flow of capital to the The Coca-Cola Company and thus into the Atlanta metropolitan area. As of now, Coca-Cola is responsible for over eight thousand jobs in the region.

But it doesn’t stop there.

If all 8,000 workers are busy working for Coca-Cola, then how do they get their haircuts and hamburgers? The answer is that, for every “export” job created—one that brings in outside money—multiple “service” jobs are generated—which circulate inside money. Thus, export employment provides an “economic base” upon which the non-export sectors of employment are sustained.

Real estate economist Arthur O’Sullivan put it simply:

“The spending and respending of income in the local economy supports local jobs, so the increase in total employment exceeds the initial increase in export employment…

Policy makers examine the interactions between firms in an urban economy and estimate the employment multiplier, defined as the change in total employment per unit change in export employment. If the multiplier is 2.10, for example, a one-unit increase in export employment increases total employment directly by one export job, and indirectly by 1.10 local jobs, for a total effect of 2.10 jobs.”

In other words, when new “export” jobs are generated in a region, they in turn set off a second wave of “service” job generation.

The pivotal insight about the multiplier effect is that higher paying export jobs create more service jobs than lower paying export jobs. It is possible for high-quality export jobs to create so many service jobs that the new service jobs start yet another wave of job creation. Using the example of high-tech jobs, Berkeley economist Enrico Moretti explained this phenomenon as such:

“Although a manufacturing company such as Boeing has twice as many jobs in Seattle as Microsoft does, it ultimately creates fewer local jobs…

High-tech workers are very well paid, with salaries and benefits typically considerably above the average. This means they consume more local services than other workers and therefore create more local jobs. With more disposable income, these employees go to restaurants, visit hairdressers, and see therapists more often.”

“Most sectors have a multiplier effect, but the innovation sector has the largest multiplier of all: about three times larger than that of manufacturing.”

At last we get to Amazon.

Whichever city lands the Amazon HQ2 will not just reap the benefits of new jobs but will undoubtedly bolster its status as a tech hub. Due to the multiplier effect, added high-tech jobs help to improve quality-of-life for all residents of the region, which starts a virtuous cycle in which the region’s attractiveness and employment growth reinforce one another. According to Moretti, “bringing one high-tech company to a city eventually results in having more high-tech companies locate there, as dense high-tech clusters make high-tech firms more innovative and more successful.”

Amazon is well aware of the financial boom that they will bring to the region they end up selecting for their new headquarters. It’s likely that Amazon has already narrowed their list of feasible “suitors” to two or three locations and the decision to announce was part of an effort to increase the bidding.

However, out of pure nerd-fueled joy, I made a map and a few scatterplots based on the two variables that I think will be most important in Amazon’s decision: airport capacity and access to research university expenditures. Clicking on the images below will take you to an interactive visualization of the data.

(click for interactive data visualization)
(click for interactive data visualization)

For now, I don’t want dive too deeply into speculating where Amazon might choose and why. However the story plays out, it will be full of important life lessons pertaining to regional economic development, regional politics, and so on. It will be important to see which concessions will be made by both Amazon and the bidding location. Furthermore, it will be interesting to see the immediate and long-term ramifications of the winning location’s regional transportation infrastructure, university-affiliated R&D expenditures, and much more.

This is definitely a case I will continue to follow. Stay tuned!


[cover image credit: Amazon]

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