Human Capital Programs Can Promote Local Economic Development; As Illustration, Consider “Promise-style” Place-Based College Scholarship Programs

A recent paper by me and a research analyst at the Upjohn Institute, Nathan Sotherland, analyzes the effects of “place-based” college scholarship programs on local economic development. Over 50 of these programs have been created since the 2005 creation of the Kalamazoo Promise. These programs, often called “Promise programs”, are distinguished by providing college scholarships that are targeted to K-12 students in a particular school district or city.

As shown by other research, such place-based scholarship programs can provide educational benefits. For example, in prior research by me and my colleagues Brad Hershbein and Marta Lachowska, we showed that the Kalamazoo Promise increased by one-third the students obtaining a bachelor’s degree.

However, human capital programs can also provide other types of benefits. In particular, they can promote the economic development of a local economy, by which I mean promoting local growth of employment and income and wealth.

Usual policies to promote local economic development emphasize labor demand approaches. These approaches seek to promote local economic development by directly providing tax breaks or other customized assistance to individual businesses, in order to encourage these businesses to locate in or expand in a local economy. Examples of such policies include property tax abatements and job creation tax credits and investment tax credits.

But local economic development can also be promoted by labor supply policies. Under labor supply policies, local employment growth and income growth is encouraged by expanding the quantity and quality of the local labor supply. Expanding local labor supply will encourage local employment growth because the availability of skilled labor is one of the key factors driving business location and expansion decisions. Studies have shown that shocks to local labor supply have about a one-for-one effect in increasing local employment.

In the just-released paper, we show that Promise-style place-based scholarships have effects for at least 3 years in reducing out-migration from a local area’s economy. These reduced out-migration effects are stronger for households with children. And these reduced out-migration effects are strongest for the area that immediately surrounds the area with Promise-program eligibility, although the out-migration effects are still large and statistically significant for the entire local labor market.

These reduced out-migration effects make sense because generous Promise scholarships provide a good reason for households to think twice before leaving a Promise area. A household might well make different decisions about moving away for personal reasons, because generous Promise scholarships are a substantial benefit.

The out-migration effects we estimate are large. We estimate that after three years, Promise programs have reduced out-migration sufficiently to increase the overall population of the local labor market area by about 1.7%. This effect occurs even though in our data, less than one-third of the average local labor market area in our data actually is eligible for Promise scholarships. Effects would presumably be larger for Promise programs whose eligibility encompassed a wider geographic area.

Based on these estimated Promise effects on out-migration and population, the immediate economic development benefits of Promise-style programs would be large compared to costs. For example, the annual costs of the Kalamazoo Promise are around $11 million. A 1.7% boost to an area’s population would be estimated to increase local property values by about 1%, based on past research (see Bartik, 1991). In Kalamazoo County, that would be an increase in property values of around $168 million. The present value of the annual costs of the Kalamazoo Promise of $11 million is about $367 million at a 3% discount rate, so the property value gain alone would be about 45% of the program’s costs.

In addition, based on prior research, we would expect that within a few years, a 1.7% boost to area population should boost local employment by a similar percentage. In Kalamazoo County, that would be a boost to employment of 1,900 jobs. The annual cost per job-year created would be about $6,000 (=$11 million/1900). This compares favorably with many economic development programs that rely on business incentives. For example, in a recent chapter for a book, based on a conference presentation at a conference sponsored by the Philadelphia Federal Reserve Bank and the University of Pennsylvania, I estimated that some typical business incentives might have a cost of around $20,000 per job created.

Therefore, immediate local economic development benefits of Promise-style programs can be substantial. These immediate benefits do not include the long-term benefits that stem from the educational effects of these programs on students.

The growth of local economies can be promoted by both labor demand and labor supply policies, as argued in my 2011 book, Investing in Kids. Smart state and local economic development will include both labor demand and labor supply policies that have a high bang-for-the-buck. On the labor demand side, these include business incentives that assist businesses that pay well, hire locally, and have large multipliers, and include business incentives that are well-designed business customized services. On the labor supply side, cost-effective policies include Promise-style programs, as well as high-quality early childhood programs.

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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