Why the goal of local economic development should be higher earnings per capita, not job growth, and why it matters

Developing good local economic development policies depends in part on having the right goals. Many economic developers and policymakers see economic development as being about increasing local job growth.

But increasing local job growth is not a sound goal for local economic development. It leads to policies that will not maximize the well-being of local residents. A much better goal is increasing the growth of local earnings per capita. An even better goal is an increase in earnings per capita that is spread broadly to most local residents.

Starting with first principles, public policy should be ultimately based on increasing at least some persons’ well-being. And in a democratic society committed to human equality, the goal should be a broad increase in well-being for a majority of the population.

Increasing local job growth does not directly, in and of itself, increase anyone’s well-being. Local job growth is an instrumental good, that is, local job growth is only good because of its effects in altering other variables. Local job growth may, for example, increase local well-being by increasing local employment rates and wage rates, which will raise local earnings per capita. So local job growth may be a good thing, but how good it is depends upon whether it succeeds in increasing local earnings per capita for many people.

Focusing on local job growth rather than local earnings per capita leads to poor policy choices. Consider first local economic development policies that focus on the “labor demand side” by interacting with employers to increase the number or quality of jobs they provide. If all we focus on is job growth, then policy will not consider what wages those jobs pay. But the wages paid by newly created jobs makes a dramatic difference to the benefits of job growth.

In addition, if we focus only on job growth, we will not favor job growth that leads to jobs being filled by local residents. To maximize job growth, we would prefer that jobs be filled by in-migrants, as in-migration will increase population growth and hence spur even more job growth. But if jobs are filled by in-migrants rather than local residents, then local employment rates will not increase. Furthermore, if the increase in labor demand is matched by in-migration, there will be much less upward pressure on local wage rates. Job growth filled by in-migrants, compared to job growth filled by local residents, leads to far less of an increase in local earnings per capita, and hence less economic benefits for most local residents. The issue of who fills the jobs created by business incentives is a key issue, and can be affected by public policies, for example by requiring assisted businesses to consider referrals from local workforce agencies.

Focusing on job growth rather than per capita earnings growth also leads to an underemphasis on ”labor supply policies”, such as early childhood education, that can enhance local labor force quality. As I have pointed out before, many participants in early childhood programs and other education programs will stick around a local economy for most of their adult working career. For example, over 60% of Americans will spend most of their working career in the state where they spent their early childhood. But the percentage of “stayers” does decrease somewhat with more education. For example, the percentage of college-educated Americans who stay in the state in which they spent their early childhood years is closer to 45% than the 60% for the overall population.

Therefore, if we adopt the mistaken goal of maximizing local job growth, we might decide we don’t want to enhance the educational credentials of our population, because this risks losing more of our population to opportunities elsewhere. But restricting the educational opportunities of local residents in order to avoid losing them to other areas is a crazy policy.

If we focus instead on higher earnings per capita for the local economy, we realize that enhancing local residents’ skills will enable them to be more productive wherever they locate. Some of these more skilled local residents will get better jobs elsewhere. But enough of these more skilled local residents will stick around to significantly enhance the average quality of the local labor force.

This higher average quality of the local labor force will have spillover benefits for most workers in the local economy.  If my neighbors have better skills, my employer will have better workers on average, and will better be able to introduce new technologies, which increases my productivity even if my skills have not increased. And generally better skills allows the creation of more productive business clusters of related industries that have  competing businesses stealing ideas and people from each other, and using high-quality suppliers. This greater productivity allows for higher earnings.

Therefore, from the viewpoint of providing a broad-based increase in earnings per capita, “labor supply” policies to enhance job skills of local residents make a lot of sense.  Local residents will get higher earnings per capita, and a higher quality of life, even if some of those with enhanced job skills end up leaving for other local areas.

Our economic development strategies will only be wise if they focus on the right goals. And if we want to help the well-being of most local residents, we should focus on the goal of broad increases in earnings per capita, rather than job growth.

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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