My book Investing in Kids: Early Childhood Programs and Local Economic Development does not just analyze the economic development effects of early childhood programs.  To fully understand the economic development benefits of early childhood programs, we need to contrast their benefits and costs with more “traditional” economic development programs. These traditional programs are business incentives.

Business incentives affect economic development by directly inducing employers to increase the jobs in a local economy. The incentive may be some reduction in taxes, such as a property tax abatement. The incentive may also be providing that individual business with some special services, such as customized job training.

In my book, Investing in Kids, I conclude that well-designed business incentives can have large local benefits relative to costs. (The national perspective is different, as I will explore in a future blog post.) Per dollar invested in well-designed business incentive programs, the estimated increase in the present value of future local earnings is $3.14.

These large effects occur even though typical business incentives probably only successfully tip the location decisions of about 4% of the businesses receiving incentives. How can business incentives have such large effects even though the “batting average” is so low? There really are two key reasons.

First, if incentives are successful, short-term incentives can result in an increase in local business activity that is permanent. We induce a business investment decision in a local economy. Economic research strongly suggests that such local investment decisions tend to persist.  In some cases the induced business will close after a few years, and no business will replace it.  In other cases, the induced business prospers in the area and later expands. In still other cases, other businesses are attracted to the area due to its larger size or its new strength in this particular industry. (These spillover effects on other businesses are what urban and regional economists call agglomeration economy effects.) Research suggests that on average, these positive and negative effects even out. For example, this pattern is clearly implied by the research of Olivier Blanchard of MIT and Lawrence Katz of Harvard.

Second, an increase in local business activity causes quite persistent effects on local employment rates and wage rates. The empirical evidence suggests that after a shock that increases local employment, local residents are more likely to be employed, and more likely to be employed in better jobs, for at least the next 15 years.

Such persistent effects occur because employment experience pays off for individuals. In the short-run, an increase in local employment allows local residents to have a greater chance of getting a job, or of getting a better job. This increased employment experience not only increases an individual’s job skills, but also increases their self-confidence and reputation with employers. As a result, long-run employment rates and wage rates are higher.

However, this all assumes that the business incentives are high-quality, which I consider in a subsequent blog post.