How might metro area growth affect the economic development benefits of business incentives? This topic is considered in chapter 9 of Investing in Kids.
We might expect fast-growing metro areas to be less in need of new jobs. If an area is fast-growing, most of the available local resident labor pool will already be tapped. New jobs, whether created by business incentives or otherwise, would be more likely to go to in-migrants. As a result, the local economic development benefits from creating new jobs by business incentives would be smaller. Local residents would receive fewer benefits.
This is precisely what my empirical work finds for metro areas whose growth rates are in the highest 40% of all metro areas. These are metro areas whose annual employment growth rates exceed 1.9%.
In my empirical work, metro area growth matters a great deal to the benefits of new job creation. For these fastest-growing metro areas, the effects of additional job growth on metro area earnings per capita are only one-seventh of effects in slower-growing metro areas.
As a result, in these fastest-growing metro areas, business incentives do not pay off for local residents. For these fastest-growing metro areas, for each dollar invested in business incentives, the increase in local per capita earnings is only 42 cents.
In contrast, as discussed in a previous post, in fast-growing areas, there will be considerable economic development benefits of early childhood programs. This pattern makes sense. If a metro area already has plenty of jobs, creating more jobs through business incentives does not help local residents much, because jobs are already available. But helping local residents get better skills, through early childhood programs, still does pay off, because it enables local residents to move up to higher wage jobs.
Faster-growing local areas should therefore reassess their local economic development strategies. Expanding investments in business incentives does not make as much sense for these areas. Instead, these areas need to consider how to better prepare their local residents for jobs. This includes investments in high-quality early childhood programs.
Obviously this advice is less relevant in today’s economy. Relatively few local areas already have plenty of jobs. However, as the economy recovers, some local areas will create plenty of jobs and have low unemployment. When this occurs, such local areas might be well-advised to reallocate their economic development budgets from business incentives to early childhood programs.