Why relocation doesn’t solve local labor market problems

Well-known blogger Matt Yglesias has an interesting post commenting on labor economist Enrico Moretti’s recent Wall Street Journal column. Moretti argues that policymakers should help workers to move away from high unemployment metro areas. (Moretti’s column is based in part on his recent book, The New Geography of Jobs.)

Other labor economists have recently argued for subsidizing workers to move away from high unemployment cities. For example, in a recent paper for the Hamilton Project of the Brookings Institution, Jens Ludwig and Steve Raphael developed a specific proposal for relocation subsidies to help workers in distressed area.

The argument for relocation subsidies is that not only do such subsidies help the workers who are relocated to a stronger local labor market, but that the induced relocation will help the remaining workers left behind in the distressed local labor market. The argument is that the relocation subsidies reduce the labor supply compared to the available jobs in the distressed local labor market, thereby reducing the distressed area’s unemployment rate.

I am much more skeptical than most labor economists of such relocation subsidies. First, I don’t think that relocation subsidies are the best solution to the problems facing workers in distressed labor market areas. If unemployment is high in some workers’ home area, and they could more readily get a job by moving elsewhere, yet these workers do not do so, the most plausible reason for this behavior is that these workers have strong and valuable ties to familiar people and places of their home area.  Solving this problem by subsidizing relocation is clearly a second-best solution. A better solution is to figure out a way to encourage stronger labor demand in their home metro area, or to figure out a way to strengthen these workers’ skills so they can more readily get a job in their home metro area. (This was shown many years ago in the work of regional economist Roger Bolton.)

Second, the available empirical evidence suggests that relocating some workers away from distressed local labor markets will not help reduce these distressed areas’ unemployment rate. The reason is that reduced labor supply in distressed local labor markets will also reduce labor demand. As some workers relocate, this reduces demand for local consumption goods in distressed area, and also dramatically reduces demand for housing and other infrastructure, which will cause a short-run downturn in local construction activity.  Some estimates, such as a classic article by Dick Muth, and other work by Mike Greenwood, suggest that at least in the short-run, a reduction in local labor supply by a certain percentage will cause a similar percentage reduction in local labor demand. The distressed areas’ unemployment rates will stay the same.

If relocation subsidies are not the solution to distressed areas’ problems, what is the solution?  What can we do to avoid the significant costs of high long-run unemployment in local labor markets, which will permanently damage the skills, productivity, and wages of many workers?

Distressed areas’ labor market problems are best dealt with by a combination of labor demand and labor supply policies. On the demand-side, distressed areas need policies that can cost-effectively raise labor demand. Business financial incentives for additional job creation in high-wage industries can in some cases be effective. Even better are business services to small and medium sized businesses that have been shown to be cost-effective in encouraging job creation. Such cost-effective services include manufacturing extension programs and customized job training.

On the labor supply side, distressed areas need policies that can cost-effectively increase the quality of local workers’ labor supply. Such policies will help attract higher wage jobs to the area, as well as helping local workers regardless of whether they stay in or leave the distressed area.  Cost-effective local labor quality policies include high-quality early childhood programs. Other cost-effective local labor quality policies include mandatory summer school in early elementary school, high school career academies, and employer-oriented job training programs for adults.

What distressed areas need are solutions that address the underlying problem, which is a lack of high-quality jobs for area residents.  Policies that develop high-wage jobs while creating higher worker skills directly address the real problems of distressed areas.

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 programs, Economic development, National vs. state vs. local. Bookmark the permalink.