Incentive Solutions

This paper reviews the research literature relevant to economic development incentives provided by state and local governments, and recommends reforms in these incentives. I argue that the main problem with current incentive policies is that state and local governments often provide incentives that are not in the best interest of that state or local area, for example that are excessively costly per job created, or that provide jobs that do not improve the job opportunities of local residents. I suggest that reforms should be "bottom-up" rather than "top-down." Regulation of incentives by the federal government, or by international trade treaties, may prevent both desirable and undesirable incentives. "Bottom-up" reforms would include more information on incentive offers, a budget constraint on the volume of incentives, stronger standards for job quality, accessibility, and performance in incentives, and better benefit-cost analyses of incentives.economic, development, incentives, local, regional, Bartik, solutions

Economic Development Strategies

This paper provides a guide to economic development policies for local government managers. Local economic development policies today include not only tax subsidies for branch plants, but also job training to provide workers to businesses, advice and support services for potential entrepreneurs, and extension services to help businesses modernize and export. To help local government managers, this paper suggests a number of guiding principles, including: local economic development should be pursued cooperatively across the local labor market; economic development programs should consider the quality of jobs created; tax subsidies are expensive per job created; development subsidies are more effective if the subsidy is frontloaded; high unemployment areas should be more aggressive than low unemployment areas in promoting job growth; many economic development services can be cheaply evaluated by business surveys.local, economic, development, Bartik

Economic Development Benefits of Preschool Expansion in Kalamazoo County

This paper examines the effects of preschool expansion in Kalamazoo County on the county’s economic development. Effects on the county’s economic development are defined as effects on the employment and earnings of county residents. The estimated effects are found to be large relative to the costs. In addition to their relevance to Kalamazoo County, these simulations illustrate how the analysis presented in two previous papers (Bartik 2006, 2008) can be done for an individual county or metropolitan area. Such simulations may be of interest to other counties or metropolitan areas that are considering expansions in early childhood programs.preschool education, economic development, community development, bartik, kalamazoo

Local Economic Development Policies

This chapter seeks to provide useful advice for local government policy towards economic development programs. The chapter: reviews the size and scope of local economic development programs in the United States; critically analyzes the various rationales offered for these programs; makes recommendations for what local policy should do about business attraction and incentives, business retention, new business development, high technology development, brownfield development, distressed neighborhoods, and downtowns; and discusses how local economic development programs should be organized, managed, and evaluated.local, regional, economic, development, Bartik, Upjohn

Increasing the Economic Development Benefits of Higher Education in Michigan

This paper considers how a state such as Michigan can increase the economic development benefits of higher education. Research evidence suggests that higher education increases local economic development principally by increasing the quality of the local workforce, and secondarily by increasing local innovative ideas. These economic development benefits of higher education can be increased by: 1) competent management of conventional economic development programs that focus on business attraction and retention; 2) policies that focus on increasing local job skills by educating the state's residents, as opposed to attracting in-migrants; 3) policies that address specific "market failures" in how higher education leads to increased workforce quality or business innovations.education, higher, economic, development, Michigan, Bartik, Upjohn

Solving the Many Problems with Inner City Jobs

Inner-city business development is often proposed as a solution to inner-city poverty. However, research evidence suggests that creating new jobs in the inner city is unlikely by itself to significantly increase the employment or earnings of the inner city poor. Public subsidies for inner city business development may be justified by greater environmental, congestion, and fiscal benefits of inner city vs. suburban business location decisions. The research evidence suggests that some boost in inner city business development may be provided by a combination of economic development incentives with enhanced public services. A different set of policies must be used to increase the earnings of the inner city poor. These employment solutions to inner city poverty should include two components; (1) creating more effective labor market intermediaries to make it easier for inner-city residents to find good jobs and for employers throughout the metropolitan area to find good inner city workers; (2) enhancing the job skills of the inner-city poor, particularly their "soft skills", by training programs that have closer ties to employers and incorporate subsidized employment experience. Given the magnitude of the poverty problem, any realistic policy to significantly reduce inner-city poverty through enhanced earnings will require tens of billions of dollars of annual government spending.wages, inner city, earnings, poverty, welfare, labor demand, Bartik

The Labor Supply Effects of Welfare Reform

Will welfare reform increase unemployment and reduce wages? The answer depends in part on how much welfare reform increases labor supply. This paper considers the labor supply effects of the welfare reforms that have occurred since 1993, when President Clinton entered office with a promise to "end welfare as we know it." The paper reviews previous estimates, and provides new estimates, of how many additional labor force participants have entered the labor force due to welfare reform. I estimate that welfare reform from 1993-96 increased the U.S. labor force by between 100,000 and 300,000 persons. Between 1996, when the major federal welfare reform bill was enacted, and 1998, welfare reform has probably increased the U.S. labor force by at least another 300,000 persons. Assuming current policy trends continue, welfare reform may add another half-million to one-million labor force participants between 1998 and 2005. The cumulative impact of welfare reform from 1993-2005 is likely to add between one and one-and-a-half million persons to the U.S. labor force. This additional labor supply is not huge compared to the U.S. labor force, so welfare reform is unlikely to have large long-run effects on overall wages and unemployment. However, this additional labor supply is large compared to likely growth in labor demand for less-educated women over the 1993-2005 period. As a result, welfare reform is likely to have significant effects on the wages and unemployment rates of less-educated women during the 1993-2005 period.welfare, reform, labor, supply, Bartik

Distributional Effects of Early Childhood Programs and Business Incentives and Their Implications for Policy

This paper is a draft of Chapter 8 of a planned book, Preschool and Jobs: Human Development as Economic Development, and Vice Versa. This book analyzes early childhood programs’ effects on regional economic development. Four early childhood programs are considered: 1) universally accessible preschool for four-year-olds of similar quality to the Chicago Child Parent Center program; 2) the Abecedarian program, which provides disadvantaged children with high-quality child care and preschool from infancy to age five; 3) the Nurse Family Partnership, which provides low-income first-time mothers with nurse home visitors from the prenatal period until the child is age two; and 4) the Parent Child-Home program, which provides home visits and educational toys and books to disadvantaged families when the child is between the ages of 2 and 3. The book considers the main benefit of state economic development to be the resulting increase in earnings of the original residents who stay in that state. Early childhood programs increase residents’ earnings largely by increasing the quantity and quality of local labor supply. These programs will increase the employability and wages of former child participants in these programs. The book compares the effects on local earnings of early childhood programs with the effects of business incentives (e.g., property tax abatements). Business incentives increase local residents’ earnings by increasing the quantity and/or quality of local labor demand. This chapter considers the effects of early childhood programs and business incentives on the income distribution. A key issue is whether early childhood programs should be targeted on the poor, or made universally available for free. Relevant considerations in addressing this issue include how benefits of early childhood programs benefit with family income, and the political feasibility of targeted versus universal programs.preschool, economic development, early childhood, education, business incentives

The Effects of Local Labor Demand on Individual Labor Market Outcomes for Diffrerent Demographic Groups and the Poor

Economists have traditionally had a keen interest in the effects of overall labor demand on the economic well-being of different population groups, particularly disadvantaged groups. The stronger the effects of overall demand on the economic well-being of the poor, the more support there is for boosting demand to "solve" poverty. But an alternative view is that the poor's problems have complicated social causes, and cannot be solved except by changes in social institutions. To put it plainly: are some people poor because the economy lacks jobs for them, or are these people poor because of something they lack? This debate has resurfaced in discussions of how to help the "underclass." Some researchers, such as William Julius Wilson (1987) and John Kasarda (1985, 1989, 1990), have attributed the growth of the underclass to the decline of central city manufacturing jobs. Other researchers, such as Lawrence Mead (1992), have attributed the growth of the underclass to cultural changes within the underclass community that have weakened the work ethic. The traditional view of economists was that aggregate economic demand has particularly strong benefits for disadvantaged groups such as the poor, the less educated, and blacks (Okun, 1973; Clark and Summers, 1981; Blank and Blinder, 1986; Blank, 1989). The benefits of aggregate growth for the poor seem to have weakened in the 1980s. Despite the long 1980s expansion, the income distribution has widened, and poverty has been little improved (Cutler and Katz, 1991; Blank, 1991). These 1980s problems for the poor are thought to be due to decreasing relative demand for unskilled workers, and a slowdown in the relative growth of college-educated versus less skilled workers (Bound and Johnson, 1992; Katz and Murphy, 1992). The evidence for this theory is mostly indirect. With only one time series on the U.S. macroeconomy as evidence, it is difficult to tell whether the effects of aggregate demand on poverty have really diminished. Because of the limited evidence in one time series of national data, some researchers have begun looking to local data to determine the effects of labor demand. The wide variety of demand conditions in local economies create a "natural laboratory" for determining the true effects of overall labor demand. These recent studies generally find that stronger local labor demand has significant benefits for the disadvantaged (Bartik, 1991a, 1991b, 1993; Freeman, 1989, 1991; Cain and Finnie, 1990). One implication of these findings is that national labor demand probably also has significant benefits for the disadvantaged. The effects of local labor demand are also of interest in their own right, and not just in what they might imply for national labor demand. Many local policies, such as local economic development policies, deliberately affect local growth. At the national level, the U.S. has generally not made significant efforts to intentionally alter the pattern of local and regional growth, but policies such as the interstate highway system probably have had important inadvertent effects on regional growth patterns. Other developed countries deliberately attempt to alter the pattern of local growth. If local demand conditions do have major effects on the disadvantaged, this raises the issue of whether some sort of national policy towards local and regional growth might plausibly be part of U.S. anti-poverty policy. The contribution of this paper is to use panel data on individuals (specifically, data from the Panel Survey on Income Dynamics) to examine how local demand conditions affect the economic well-being of disadvantaged groups and the poor. Previous research on local labor demand conditions uses data from a single cross-section of local economies, or a time-series of cross-sections of regions. With such data, estimated effects of local labor demand conditions on average labor market outcomes might be attributable to changes in local population composition, as we would expect local demand conditions to change in- and out-migration patterns. Because panel data follows the same individuals over time, it can address the important issue of whether local labor demand conditions affect specific individuals. This paper's estimates suggest that growth in the metropolitan economy particularly helps disadvantaged individuals. Local growth has stronger relative effects for males who are less educated, younger, or have lower expected earnings or work hours, and for females in poorer families. Local growth also has significant effects helping both males and females to exit from poverty, and helping prevent males and females from entering into poverty.labor, demand, demographic, groups, poor, Bartik

Thinking about Local Living Wage Requirements

This paper reviews what we currently know about the benefits and costs of different varieties of a "living wage": a local government requirement, now adopted by over 50 local governments, for wages above the federal minimum imposed on employers with some financial link to the local government. The review includes economic theory, empirical research on local labor markets, and empirical research on the living wage. The paper concludes that moderate living wage requirements applied to the local government's own employees, and contractors' and grantees' employees who are funded by the local government, may do more good than harm. Excessive living wages or living wages applied to non-city funded workers are more likely to have negative side-effects. The merits of living wages applied to economic development assistance depend on the local economy's strength and whether this assistance program is used by the city's competitors. In a weak local economy, living wages applied to commonly-used economic development programs may reduce the city's economic growth.living wage, cities, Bartik, Upjohn