State economic development policies: what works?

I delivered a speech about  state economic development policies on November 30, 2011. The presentation was made in D.C. at the 19th Annual State Fiscal Policy Conference of the Center on Budget and Policy Priorities. The text of my prepared remarks can be found here. At the end of the text, I link to longer, more detailed reports that provide research support for the arguments made in my speech.

The main point of the speech is that state policymakers do have good choices for policies that will achieve large benefits for state economic development goals at an affordable cost. The goal of state economic development policy should be higher earnings per capita that is broadly shared – job growth is a means to that end, not an end in itself.

It is particularly important for state economic development policies to be cost-effective because state governments’ available resources are modest compared to the size of state economies. If economic development policy is to really make a large percentage difference to earnings per capita of many state residents, then policy must have impacts on earnings per capita that are many multiples of costs. In addition, because economic development policies must be paid for, and financing economic development policies through tax increases or spending cuts has some damaging effects on a state’s economy, the net effect of state economic development policy will only be large if the positive effects of the policy exceed the negative effects of the policy’s financing.

Two broad types of economic development policies should be pursued. Labor demand policies interact with employers to directly increase the number and quality of jobs that employers offer. Labor supply policies interact with state residents to increase the quantity and quality of their labor supply, which will have powerful indirect effects on improving the number and quality of jobs in the state.

On the employer side, policies with good evidence for success include customized services to improve the productivity of small and medium sized businesses. Examples of such policies include customized job training programs, and manufacturing extension programs.

On the labor supply side, policies with good evidence for success include both early childhood interventions and later job training interventions. Early interventions have the advantage of benefits for a broader cross-section of the population than is true for later interventions. At an earlier age, most children receive significant benefits in long-run earnings from simply having extended early learning time. At later ages, educational and job training programs tend to be more effective for persons who already have reasonably good basic skills, but who can benefit from better job-specific skills.

Later interventions are also somewhat more complicated to design and run. To provide better job-specific skills, programs must have extensive involvement with employers to help design training programs, and to develop trusting relationships to facilitate job placement. These relationships can be challenging to develop and maintain. In contrast, it appears reasonably straightforward to develop and manage many early childhood programs. For example, we see good results in pre-K programs financed by many states, which suggests that it does not take some genius public administrator to run such programs.

These labor demand and labor supply policies all aim at boosting long-run earnings per capita in a state. Yet in today’s economy, many states face urgent needs for short-run job creation. Programs similar to Minnesota’s former MEED program, which provide wage subsidies to smaller employers to create jobs for the unemployed, may be a cost-effective way of generating short-run jobs.

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.
This entry was posted in Business incentives, Early childhood program design issues, Early childhood programs, Economic development, Incentive design issues. Bookmark the permalink.