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Economist forecasts impact of strike

Report shows losses less than estimated

A UCLA economist is throwing cold water on estimates that the writers strike will have a $1 billion economic impact if it lasts as long as the WGA’s five-month work stoppage in 1988.

“As it turns out, a close examination of the economic dynamics of the 2007 WGA strike suggests a much more modest and transitory impact on the Los Angeles economy,” said Jerry Nickelsburg of the UCLA Anderson Forecast. “The impact, even if the strike runs as long as the record 1988 strike, will be about one-third or less of the currently accepted $1 billion estimate.”

Nickelsburg issued his report Wednesday as the strike entered its 24th day with negotiators meeting for the third consecutive day amid a news blackout.

The Los Angeles Economic Development Corp. recently issued the estimate of the strike resulting in $1 billion in damages to the local economy. But Nickelsburg noted that such initial forecasts may be out of whack since strikes are predictable events and those affected try to mitigate their impacts through such steps as stockpiling.

“To be sure, hardships and economic dislocation occur as some people suffer from lost wages which are never recouped,” Nickelsburg added. “And, one ought not to minimize the difficult situation those individuals find themselves in. But, from an aggregate perspective, once the dynamics of the strike are incorporated, this particular strike ought to have only a minor impact on the L.A. economy.”

He also noted two trends showing evidence of stockpiling — the FilmLA permitting agency had shown off-lot activity had bumped up in late 2006 and the first two quarters of 2007; and a September spike of almost 8,000 new employees in the industry and noted “While part of this could be a data anomaly, clearly some is related to the finishing of production on stockpiled programs.”

Nickelsburg also noted that stockpiling occurred prior to the 153-day strike in 1988 and the averted WGA strike in 2001, when a deal was made three days after contract expiration. And he calculates that the actual loss of income was only 1.3% to 1.5%.

“For employees and independent contractors in the industry, the stockpiling of shows means additional income during the pre-strike period,” he wrote. “In an industry which is characterized by irregular spells of employment and unemployment, it is reasonable to assume that this additional income was not viewed as a windfall, an addition to wealth, and was therefore put away as a cushion against the future strike. What is important to note is that if this addition is viewed as cash flow shifting rather than windfall gains, then overall consumption patterns will not change. That is, the cash is earned earlier, but used for consumption later.”

Nickelsburg warned that a strike may lead to consumers substituting other activities outside guild-covered shows. He pointed out that Nielsen ratings showed the 1988 WGA strike resulted in a permanent 10% substitution away from scripted shows to other entertainment.

“If consumers who would otherwise watch those shows spend their entertainment time and dollars elsewhere, they will generate expanded economic activity in related industries,” he noted. “This will partially offset the cost to the L.A. economy through the hiring and income derived from this substitution.”

Nickelsburg also said there’s much more alternative entertainment today than there was in 1988 so a long strike carries as much risk of substitution.

“Video games, Wiis, PlayStation 3s and other devices, content downloaded to iPods, and telephones, YouTube, MySpace and Facebook, are but a few of the threats to the industry of a long strike,” he wrote. “But, to the extent that alternative content is produced in L.A., the economic impact must be measured in terms of the net impact. To keep our analysis of the economic impact from being too conservative, we assume that the strike, if it were to play out like the 1988 strike, would create the same 10% loss to the industry through substitution of other L.A. content producing entertainment.”

Nickelsburg also said the rise of reality shows – most of which aren’t covered by the WGA – makes it difficult to compare wage losses from the 1988 strike to today.

“Extrapolating from the wages not paid during the 1988 strike to today’s industry ignores the shrinking importance of scripted television and overstates the impact of the strike,” he added. “Assuming a 45% unscripted programming rate to remain conservative (most industry observers expect this to increase) and the aforementioned 10% substitution rate we get an economic impact of $380 million. If the strike were to end before the end of March, the impact would be smaller, but efforts to end the strike prior to the burning off of inventories would not have much effect on the cost induced by stockpiling.”

Nickelsburg also noted that showbiz generates about $20 billion in income annually while the overall Los Angeles economy generates around $380 billion each year so that the increased activity in the first three quarters of 2007 pushed growth rates for each quarter up by about 0.25%.

He estimates that the largest quarterly impact of strike will be a reduction in the first quarter 2008 growth of 1% with growth of personal income in Los Angeles in 2008 edging down 0.25% as a consequence of the strike – assuming the work stoppage last as long as it did in 1988.

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