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Federal Highway Administration > Publications > Public Roads > Vol. 59· No. 4 > The Economic Importance of the National Highway System

Spring 1996
Vol. 59· No. 4

The Economic Importance of the National Highway System

by Thomas F. Keane

When transportation decision-makers at the federal, state, and local levels discuss possible investments in highway infrastructure and the impacts, they sometimes overlook one very important potential impact - the economic benefits to national productivity and employment.

The signing of the National Highway System Designation Act of 1995 by the president on Nov. 28, 1995, meant an additional influx of $5.4 billion into the federal-aid highway program targeted to the National Highway System (NHS).

NHS is a connected network of almost 260,000 kilometers of roadways that serve major population centers, international border crossings, ports, airports, public transportation facilities, and other intermodal transportation facilities and major transportation destinations; meet national defense requirements; and serve interstate and interregional travel.

NHS represents just 4 percent of America's 6.4 million kilometers of public roads, but NHS carries more than 40 percent of the nation's highway traffic and 70 percent of the truck freight traffic. NHS provides the vital links to efficiently move people and goods to the desired destinations.

Economic Benefits of NHS Investment

How does $5.4 billion in investment in NHS translate into improvements in economic productivity? A region's industrial and employment base is closely tied to the quality of the transportation system. Good, dependable transportation infrastructure allows businesses to receive inputs to production facilities and to transport finished goods to market in an efficient manner. An efficient transportation system allows companies to lower transportation costs, which lowers production costs and enhances productivity and profits.

Funds invested to upgrade or maintain the quality of NHS enable firms currently operating on the system to ship goods more cheaply (as trucks can reach destinations without major delays) and to improve service (as delivery schedules become more reliable). Subsequently, more timely and reliable deliveries allow firms located on or near NHS routes to minimize their stationary inventories, thereby saving inventory and storage costs and enhancing productivity. Collectively, this translates into higher productivity for the nation as a whole.

NHS accentuates the focus on key arterial highways serving interstate and international commerce. The competitiveness of the United States in the global marketplace relies upon expectations for improved intermodal linkages between the highway system and other transportation modes. Economic impacts arising from these linkages will yield significant effects on the overall U.S. economy, the standard of living of U.S. citizens, and the competitiveness of U.S. industry.

In addition, NHS investment may result in net positive impacts to employment levels within the nation, as public funds are diverted from less labor-intensive investment options to those supporting greater overall employment, such as highway construction and maintenance.

Research on Economic Benefits of Highway Investment

Highway infrastructure project in Phoenix, Arizona.For the past several years, the Federal Highway Administration (FHWA) has been involved in research on infrastructure investment and national productivity. The critical question is: "How do changes in highway investment translate to private productivity at the national level?"

This effort involves two very important and intertwined research areas. The first - macroeconometric analysis - investigates national and state-level linkages, using methodologies such as the production function to gain an overall understanding of the relationship between transportation and economic growth. The second approach - microeconomic industry analysis - explores the connection between individual industries and transportation infrastructure by examining in detail the impact of public highway investment on individual firms' behavior.

Macroeconometric Analysis

Initial estimates at the national and state levels suggested a positive relationship between all public infrastructure investment (especially transportation) and economic productivity gains. Estimates of the impact of all public investment on national output, using production function methodology, have ranged from the extremes of highly positive to marginally negative. Although the majority of studies have indicated a positive relationship, the specific magnitude of that relationship is heavily debated.

The high extreme suggests that a 10-percent increase in public investment will yield (roughly) a 4-percent increase in national output. Although the initial research was concentrated on the broad macroeconometric area, recent advancements in knowledge have led to more concentration on the microeconomic (industry-and firm-level) research.

Microeconomic Analysis

Industry case studies have attempted to determine the importance of reliable and timely transportation to specific sectors. FHWA has learned that a reliable and efficient transportation network allows firms to: (1) generate innovative new management and distribution systems; (2) save inventory costs by using just-in-time delivery techniques, which are based on minimizing inventory while maximizing the use of efficient and timely delivery; (3) pass savings on to customers as transportation and logistics costs are lowered; and (4) access larger input and labor markets, thereby providing a more creative, efficient, or higher quality product.

Specifically, results from the first set of industry case studies performed by FHWA indicate that, for the manufacturing sector, significant cost savings are achieved by using a reliable and efficient transportation network in the production process. (The magnitude of impacts differs over time and across industries.) Preliminary estimates indicate that recent highway investments yield significantly positive rates of return in the manufacturing sector as a whole.

FHWA research has also shown that transportation infrastructure is playing an important role in the growing service sector. Results indicate a positive and significant relationship between transportation infrastructure and the transportation services, communications, and public utilities industries, as well as the retail trade and services industries.

Employment Research

Traditionally, the impacts of investment on employment have been categorized as the direct, indirect, and induced employment impacts of highway investment.

Naturally, a $5.4 billion increase in highway capital investment targeted to NHS will generate a direct impact on employment in the highway construction industry as managers, specialists, and semiskilled and unskilled laborers are called upon to construct new roads, resurface existing ones, or perform various capital improvements that enhance highway service levels.

These investments will also generate jobs in many other industries - an indirect impact. For instance, companies that supply materials for highway construction will receive orders for more materials. The need for more materials will require firms in these "supplying" industries to hire more labor to process orders and deliver materials to construction sites. And manufacturing companies will have to produce more materials to meet the need.

Also, individuals who work in these industries subsequently spend and invest their earnings within the local, state, and national economies, thereby generating jobs across many industries and geographic areas - an induced impact.

FHWA, with contractor assistance, recently completed studies to estimate the direct, indirect, and induced employment impacts of federal-aid highway investment. The approaches used to estimate the direct versus the indirect and induced impacts differs somewhat, due primarily to internal data and technical constraints.

Direct Employment

Downtown Hartford, Connecticut interchange of I-84 and I-91.To estimate the direct employment impacts from the federal-aid system, FHWA used specific labor and materials cost data on all federal-aid primary, urban, and interstate highway projects where total project costs exceed $1 million, as reported by highway contractors to FHWA for the period January 1989 to August 1993. The database contains complete information on 4,532 projects, including labor costs, hours of employment, total project costs, region, urban/rural status of project, improvement type, and other project-specific information. Data and results from multiple regression analysis are described in FHWA Direct Employment Impacts: A Quantitative Analysis, May 1995.

Using this data and making an assumption regarding the average number of hours worked per year per employee (1,600), it is possible to estimate the number of full-time equivalent jobs supported per $1 billion dollars of federal-aid highway investment.

Using FHWA highway program composition data from 1993 and the forecasts of highway construction costs based on the FHWA Highway Construction Price Index, it was estimated that $1 billion (in 1995 dollars) of federal-aid highway program spending in 1996 would support approximately 7,900 full-time, on-site, highway construction jobs nationally.

Results are in Table 1.

Table 1 -- Direct, Indirect, and Induced Employment Impacts of Federal-Aid

Type of Employment Jobs Supported
Per $1 Billion
Federal Spending
Modeling Approach
Direct 7,900 FHWA HIGHWAY1 Model
Indirect 19,700 Dynamic I/O Model
Induced 14,500 Dynamic I/O Model
Total 42,100 ---

Indirect and Induced Employment

Attempting to estimate the employment supported by supplying industries and throughout the economy as a result of increased highway investment is more complicated than the direct employment estimation approach. This is due to the complex interactions that occur among many industrial sectors within an economy. It is well recognized that certain industries within a macroeconomy use the output of other industries as input into their own production processes. By establishing some basic assumptions about where federal-aid highway investment dollars are spent (e.g., new construction or maintenance), accepting the model structure as it relates to industrial interactions, and using FHWA data regarding materials usage in federal-aid projects, it is possible to estimate the impact of increased federal-aid highway investment on employment in highway construction, in supplying industries, and throughout the economy.

To derive the indirect and induced employment estimates for this study, FHWA researchers used input-output analysis. They assumed a $3 billion federal stimulus (in 1995 dollars) to federal-aid highway investment (specifically, new construction) over a period of three years (1996-1998), with 27 percent of funds invested in the first year, 46 percent invested in the second year, and 27 percent invested in the third year. Results indicate that each $1 billion of federal investment in federal-aid highways supports approximately 19,700 indirect jobs and 14,500 induced jobs.

While the above employment estimates were derived from studies that examined federal investment across the broader federal-aid highway system (which includes NHS), one can get a general idea of the total national employment impacts that would likely occur if $5.4 billion of federal funds are invested in NHS.

Cautionary Notes

A common misconception regarding job-generation estimates is that, in the absence of NHS investment (or general highway spending for that matter), workers in "generated" jobs would be unemployed. This is not usually the case. Job generation within this paper refers to gross job creation. That is, these jobs are directly attributable to the project, and employment impacts from alternative uses of the funds are not considered. Identification of alternative investment options are not considered here due to the difficulty of identifying specific alternative investment options at a broad federal level.

The potential for net employment gains within an economy as a whole from highway infrastructure investment is dependent upon the labor intensity of the highway construction and supply industries relative to that of industries associated with the alternative investment. In the case of highways, unpublished data from the Bureau of Labor Statistics (BLS) reveal that federally aided highway construction and maintenance work is the most labor-intensive of those construction activities examined by the BLS. Table 2 lists the estimated total direct and indirect jobs supported by each activity in 1982, per billion (1982) dollars.

Table 2 -- Relative Labor Intensity of Various Construction Activities

Private Multi-Family Housing 24,785
Private Single-Family Housing 21,801
General Hospitals 25,311
Elementary and Secondary Schools 23,815
Federally Aided Highways 26,295
Sewer-Line Work 23,580
Sewer-Plant Work 22,951
College Housing 23,427
Civil Work, Land 20,910
Civil Work, Dredging 22,764
Public Housing 24,415
Federal Office Buildings 24,628
Commercial Office Buildings 22,159

Although the direct employment impact analysis using internal FHWA project-level data was conducted at the national level for the purposes of this study, FHWA has developed a flexible, user-friendly PC model (HIGHWAY1 Model) that allows for direct employment impact analysis at the regional level. The user has the ability to set parameters, such as the total program funds appropriated to each region, the mix of federal-aid improvement projects undertaken within each region, and the urban-rural mix of projects.

The software queries the user to enter: (1) total federal funds, (2) year of proposed spending, (3) price deflator, and (4) whether or not state matching funds should be included in the analysis.

The user is given the option to directly input or select default values (based on the 1993 highway program) for: (1) the distribution total of spending across FHWA regions, (2) the composition of spending by improvement type (new construction, 3-R, bridge, etc.) within each region, and (3) the division of regional program expenditures between urban and rural projects.

The HIGHWAY1 Model does not reflect the temporal, or time-sensitive, relationship between project expenditures and direct employment generation. For instance, there is no lag effect incorporated into the obligation of federal-aid highway funds and their expenditure. When the dollar level of funding is specified in the model, it assumes that the funding is expended immediately (at one time point), not over a period of years, as would be typical of federal-aid dollars obligated to the states for highway projects.

Summary

I-270 corridor in Maryland.Passage of the NHS meant an influx of $5.4 billion of federal funds targeted to the most important road network in the nation. While this influx of funds provides increased mobility and safety resulting from a higher quality highway system, it also provides economic benefits in the form of national productivity and employment growth.

The benefits of infrastructure should not be viewed only as a short-term stimulus, but rather the long-run benefits should be recognized.

Many crucial questions remain concerning the contribution of public capital, specifically highway infrastructure investment, to economic vitality and competitiveness. It is clear that, at the national level, the reliable movement of freight on the transportation network assists U.S. businesses to compete in the international market.

Further research will establish, measure, and articulate the linkages between transportation investment and broader economic objectives to provide a better understanding of the relationships between the transportation network and aspects of economic development and international competitiveness.

Research indicates that investment in the federal-aid program generates approximately 7,900 full-time equivalent jobs per $1 billion invested in highway construction. In addition, research shows that this same $1 billion investment supports approximately 19,700 full-time equivalent jobs in supplying sectors and 14,500 positions in the general economy. Therefore, total employment supported per $1 billion federal-aid highway investment is equal to approximately 42,100 jobs. These estimates refer to "gross" job creation, meaning that the employment impacts of alternative investments have not been considered in this broad level of analysis.

Applying these estimates to the $5.4 billion invested in NHS indicates that the employment impacts of NHS equal more than 225,000 full-time equivalent jobs.

Thomas P. Keane is an economist in FHWA's Office of Policy Development. He works both in research relating to the economic impacts of highway infrastructure investment and on the FHWA Congestion Pricing Team in the areas of variable tolling and parking pricing issues. He has been employed by FHWA since November 1990. He has a master's degree in applied economics from the University of Maryland.

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