SAN JOSÉ STATE UNIVERSITY
ECONOMICS DEPARTMENT
Thayer Watkins
Economic Multipliers, Income and Employment
The employment multiplier for an economy is defined as the ratio of the
change in total employment to the change in employment in basic employment. In symbols this is:
kE = 
(EB + EL)/EB
where EB is basic employment and EL is employment serving
the local market.
The definition of the income multiplier is analogous.
kY = (YB + YL)/YB
Let aB be the wage income generated per unit of local
basic production and aL is the wage income generated per unit of
production for the local market. Also let WB and WL be
the wage rates in basic industry and local market industries, respectively.
With these definitions then
EB = aBYB/WB
EL = aLYL/WL
The production serving the local market is given by:
YL = (kY-1)YB
When these relations are substituted into the definition of the employment
multiplier the result is:
kE = 1 + (kY-1)(aL/WL)(WB/aB)
or
kE = 1 + (kY-1)(aL/aB)(WB/WL)
The latter formula points up the fact that the income and employment multipliers
differ because of differences in the wage rates in basic and local market serving
industries or the share of production costs accounted for by labor.
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