Why business incentive competition within metro areas makes no sense

The April 8 New York Times had an article by A.G. Sulzberger on competition for business within the Kansas City metropolitan area, between the Kansas and Missouri portions of the KC metro area. The article quoted me as saying that in such a competition, the “gains are much more modest than the losses”.  What are my reasons for this claim?

The primary reason for this claim is that intra-metro competition for business does little to advance the most important goal of economic development, which is higher per capita earnings for local residents. Per capita earnings for local residents does depend on local labor demand. Attracting more or better jobs to a local economy will raise per capita earnings. But a local economy is bigger than a neighborhood or even a city. Metro areas are explicitly designated by the Census Bureau to constitute local labor markets. Metro area boundaries are drawn so that there is much commuting within the metro area, and relatively little commuting across the boundary of the metro area. Therefore, what matters to local residents’ per capita earnings is local labor demand for the metro area as a whole. How that labor demand is distributed within the metro area is far less important.

Consider the example of the movie theatre chain AMC, which is mentioned in the New York Times article. AMC is currently located in downtown Kansas City, Missouri. AMC is considering building a new headquarters.  The State of Kansas is offering AMC a package of incentives to relocate its headquarters to the suburban Kansas portion of the Kansas City metro area.

According to reporter Sulzberger,

The CEO of AMC, Gerry Lopez, is “skeptical… about any broader benefit to an area where the lives of most of his employees already extend comfortably to both sides of the border.

“Will there be any net improvement to the region?” he asked. “Probably not.”

Thus, Mr. Lopez is pointing out that there is sufficient commuting of his employees that probably the relocation will have the same employees in the same jobs. The labor market benefits of such a relocation are nil.

However, the case can be made even stronger than the case made by the AMC CEO. Suppose that none of AMC’s employees happened to have cars. Suppose that as a result, the shift from Missouri to Kansas did shift employment at AMC from Missouri residents to Kansas residents.

Even under these extreme and unrealistic assumptions, the labor market gains for Kansas residents would not be large. The point is that even if the AMC employees do not commute across the state boundary, many local residents and workers do commute between the two states. The new AMC employees who get jobs in Kansas will in many cases open up job vacancies in employers in Kansas. The job vacancies will be filled by residents of both Kansas and Missouri. This “vacancy” chain will in turn open up job vacancies in Missouri that will be available even to the former AMC employees in Missouri without jobs.

The point is that we don’t need to have everyone commute across state boundaries for labor market conditions to tend to spread out across the entire metro area. We just need “sufficient” commuting for labor market conditions for similar workers to be similar throughout the metro area.

My assertion is more than simply saying that the Kansas City metro area as a whole does not have net benefits from the suburban Kansas portion of the metro area enticing jobs away from the Missouri portion. My assertion is that these business incentives do not produce large labor market benefits even judged from a “Kansas-only” perspective. Why? Because relocating jobs within a metro area does not, in general, provide any labor market benefits for anyone within the metro area, and it is these labor market benefits that should be the focus of local economic development policy.

The exception to this rule might be for jobs provided to a very low income neighborhood within a metro area, when the low income residents of that neighborhood are quite isolated from the overall metro area labor market. In that case, there may be some gains for the quality of that neighborhood from relocating jobs to that neighborhood. This can be done, for example, through policies such as the federal Empowerment Zone program of the 1990s.

However, in general we should be encouraging metro areas to have cooperative economic development policies across all jurisdictions within the metro area. Encouraging such cooperation is more difficult for metro areas than span state boundaries.

A metro area that is cooperating in economic development is better prepared to consider what policies will best promote a long-run increase in local per-capita earnings. Such policies include cost-effective business incentives as well as high-quality early childhood programs and other investments in improving the skills of the local labor force.

About timbartik

Tim Bartik is a senior economist at the Upjohn Institute for Employment Research, a non-profit and non-partisan research organization in Kalamazoo, Michigan. His research specializes in state and local economic development policies and local labor markets.
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