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Employment Impacts of City of Chicago Purchasing Contracts

Toward these ends, the City of Chicago has purchased a simulation model of the regional economy prepared by Regional Econometric Models Inc. (REMI). Part of the report that follows aims to determine the most effective use of the model and its reliability for the job impact program. In addition this report makes estimates of economic impacts of city contracts in nine different categories based on a field investigation and a subsequent interpretation of REMI simulations. Finally we recommend some approaches to needed monitoring of job impacts based on an analysis of existing monitoring procedures in the city. A summary of the results follows.

Most results and conclusions are summarized below by expenditure category. A separate set conclusions is presented with respect to monitoring. There are some conclusions, however, that are common to all or most categories.

One relates to the potential for import substitution. With a few exceptions, many city contracts go to distributer firms. While wholesaling activity can have large employment impacts, this does not tend to be true of city contract recipients. This is because of the nature of those contracts. Wholesaling firms receiving city contracts tend to be small distributers of products produced outside of the Chicago area. Drugs and chemicals is an example. The typical purchase of drugs and chemicals by the City of Chicago was from a small firm that was simply representing a drug company in another location. Thus job impacts are minimal. Another kind of situation is represented by the purchase or lease of automobiles, trucks, heavy construction equipment and similar large items. In these cases, not only are the items manufactured outside the area, but in addition employment impacts are often the reverse of what one might expect. That is, as sales decline, firms may hire more sales people and lay them off in better times.

For these reasons, we have noted throughout this report areas where the city might consider import substitution potential of their spending policies. We could not completely answer the question of whether a "buy Chicago" requirement would be wise in the various categories we have considered. But we have flagged those areas where there seem to be potential benefits.

A second general conclusion relates to the possibility of enhancing the employment impacts of existing city spending patterns. Our survey of firms receiving city contracts revealed considerable variation in the extent to which firms patronize local suppliers. Similarly the percentage of city residents employed by local firms was quite varied. Thus one recommendation of this report is that the City of Chicago look into utilizing the percentage of vendor costs going to Chicago firms and the percentage of city resident employees as criteria for receiving contracts. Companies that patronize local firms and hire Chicago residents could be rewarded in a consistent way through bidding criteria. This may well stimulate the job creation potential of existing spending patterns.

One final general conclusion relates to existing contract processes. In the course of our interviews a significant number of firms volunteered their views on the difficulties of doing business with the City of Chicago. One theme was most evident for contracts relating to motor vehicles but was repeated by other types of firms as well. The cost of paper work combined with slow payment on the part of the City of Chicago tended to place small firms at a distinct disadvantage. This is because smaller firms often face a tight cash flow situation where slow payment can be fatal. Further, the mountain of paper work involved in many instances requires specialized personnel to handle government contracts. A total effort to implement a job impact program will therefore require a review of possible practices that can offset policy intentions.

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UIC-Center for Urban Economic Development