The economic impact of a university upon the local community

Abstract

This study analyzes both the conceptual validity and empirical accuracy of representative studies designed to estimate the impact of a university on the local economy. Two major sources of error exist in the literature to date. The first involves the use of a local multiplier. The economic base multipliers typically used in impact studies are found to be too large when applied to the university sector. A significantly smaller multiplier was estimated with a local value added approach based on spending emanating specifically from the university sector. The difference is attributed to the high propensity for university related expenditures (the school proper, faculty, staff, and students) to leak out of the local economy, and to the high proportion of local expenditures on items with low local value added.

The second major source of error has been in the analysis of the local employment impact of student spending. Previous attempts to convert student expenditures to employee equivalents have implicitly assumed that the entire value added is locally generated. The substitution of a more reasonable assumption leads to a much lower estimate of the direct employment impact of student spending.

When the revised methods for estimating both the multiplier and the employee equivalent of student spending are used, the local economic impact of the university is greatly reduced. Using data from Kent State University and the Kent, Ohio economy, these new methods show an impact of less than one-half of the impact estimated with earlier techniques.