In a previous post, I explored how the economic development benefits of a local area’s investment in early childhood programs might vary with the local area’s population size. In today’s post, I explore how metro area size might affect the economic development benefits of business incentives.  This issue is also considered in chapter 9 of Investing in Kids.

By “business incentives”, I mean assistance to individual businesses that is more or less customized to that individual business. In the U.S., most such state and local business incentives are tax incentives. For example, at the local level, one of the most common business incentives is a property tax abatement. Under property tax abatement, a new branch plant or a plant expansion might pay below-normal property tax rates for some period of time.

The economic development benefits of business incentives depend on who gets any new jobs created. Ultimately, any new jobs created by business incentives (or by anything else) must be reflected either in increased employment rates for local residents, or increased population, for example through in-migration. Obviously some of the new jobs created by a business incentive can directly go to local residents who already were employed. But this creates job vacancies that must be somehow filled. The chain of job vacancies will continue until a job is filled either by a local resident who would have otherwise not been employed, or by a person who otherwise would have lived elsewhere.

The more jobs go to local residents who would otherwise be nonemployed, the greater the local benefits of any new job creation, whether brought about by business incentives or otherwise.

My empirical research for Investing in Kids suggest that who fills newly created jobs only differs significantly for metro areas below about 800,000 in population. For these metro areas, newly created jobs are more likely to be filled by increasing local employment rates, and less likely to be filled by increased in-migration.

However, these differences are modest. I estimate that for metro areas with less than 800,000 in population, the economic development benefits of business incentives are about one-sixth greater than for larger metro areas.

What is going on here? One can speculate that smaller metro areas may be less likely to attract in-migration due to job growth. Therefore, a higher percentage of any newly created jobs will go to current residents who would otherwise not be employed.

Combining these results for business incentives with previous results for early childhood programs, we find that in smaller metro areas, the balance of economic development benefits is tipped slightly towards business incentives and away from early childhood programs. However, these differences are modest. Regardless of metro area size, both business incentives and early childhood programs can pay off for a local area’s economic development.