Why a particular focus on distressed communities? Because there are huge differences in the availability of good jobs from place to place, and those differences lead to very different economic opportunities for residents. Targeting distressed places does more to solve these inequalities than blindly dispensing aid. As an added bonus, focusing on distressed communities leads to greater social benefits per taxpayer dollar invested.
One way to measure the economic distress of a community is to look at the prime-age employment rate, the share of people who have jobs and are in the 25- to 54-year-old age category when most Americans are in their peak working years. The difference in prime-age employment rates between distressed and booming places is dramatic. Ten percent of the U.S. population lives in booming places, where the prime-age employment rate exceeds 83 percent. Another 10 percent live in distressed places, where the prime-age employment rate is below 75 percent. Lower employment rates in distressed places are associated with poorer mental health, substance abuse, crime, family breakdowns and local fiscal problems. Children from distressed places end up with lower earnings as adults.
According to our analysis, the benefits of targeting job creation on distressed communities are four times those of job creation efforts focused on booming places. For every 100 new jobs created in a distressed area, about 40 more residents will become employed who previously were not. In contrast, creating 100 jobs in a nondistressed place leads to only 10 more jobs for the local unemployed, with the balance coming from greater in-migration, often resulting in gentrification. If you want to help the nonemployed, create jobs where they live.
It is also true that the benefits of targeting job creation in distressed areas continue for decades. The job experience residents gain from employment increases workers’ skills and confidence, leading people to become more competitive in the job market. This, in turn, enables them to get better jobs in the future, creating a ripple effect that helps even their children become more successful.
State governments and governors should follow three principles to most cost-effectively promote job creation in distressed areas. First, state economic development programs should be place-focused, prioritizing economically distressed areas. Current state economic development efforts tend to emphasize statewide business tax incentives, which gives the state’s booming areas even greater advantages in attracting new businesses and the jobs that come with them.
Second, states should reallocate economic development budgets to put less emphasis on business tax incentives and more on providing public services that enhance business growth: proven cost-effective programs such as customized business advice for small businesses, investments in public infrastructure, brownfield redevelopment, research and business parks, and customized job training programs. These investments create jobs at less than one-third of the cost of tax incentives and other giveaways. Yet current local economic development programs spend only $1 on these policies for every $6.50 spent on incentives.
Third, the remaining business tax incentives should be reformed to have shorter durations. Longer-term tax incentives are tempting for governors, as they are giving away their successors’ tax base. U.S. businesses, however, tend to focus on short-term profits, so tax incentives paying out 10 years from now have little effect on business location or expansion decisions. Incentives should be up front, with clawbacks if the promised jobs fail to materialize. Upfront incentives force states to be more cautious in handing out cash, while also making the cash more relevant to business decision-makers.
State governments, even if they don’t remain flush with cash from the COVID-19 recovery funding and new infrastructure money, have the power with their own resources to adequately target distressed communities. States already devote around $50 billion per year to costly business tax incentives that mainly go to booming communities. That budget is sufficiently large that if cost-effectively targeted at distressed communities, states could cut in half the employment-rate gap between distressed communities and the U.S. average.
Policymakers at the state and federal level already have the tools to prioritize reducing the number of people left behind by an ever-changing economy. Their challenge now is to use them.
Tim Bartik is a senior economist at the W.E. Upjohn Institute for Employment Research. Kathleen Bolter is the program manager for Upjohn’s “Promise: Investing in Community” initiative.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
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