4.5 How well have regional policies performed at strengthening economic opportunities?

120 e mployment in Crisis

BOX 4.5 How well have regional policies performed at strengthening economic opportunities?

Local job creation efforts often involve (a) investments in infrastructure and in local public goods and services, (b) direct subsidies to firms, or (c) the relocation of public sector employment or large public agencies to depressed areas. Neumark and Simpson (2015) provide an overview of the literature on these types of policies, updated by Ehrlich and Overman (2020) in the context of the European Union (EU). Overall, the evidence suggests that investment in transportation infrastructure and in local public goods and services in a mix of firm subsidies and training, as is done by the EU’s cohesion funds, has on average been effective at fostering growth in recipient localities and thus at reducing disparities across places in economic opportunities (Becker, Egger, and Ehrlich 2010; Giua 2017; Mohl and Hagen 2010; Pellegrini et al. 2013).

However, the effects of these programs vary considerably across areas: they are high in regions with high human capital and high-quality local governments but low elsewhere, yielding different trade-offs between spatial inequality and aggregate efficiency (Becker, Egger, and Ehrlich 2013). They also have diminishing returns: the effectiveness of these programs decreases as transfers increase (Becker, Egger, and Ehrlich 2012; Cerqua and Pellegrini 2018). And there is no evidence that their effects last for long (after the region loses eligibility for the program) (Barone, David, and de Blasio 2016; Becker, Egger, and Ehrlich 2018; Di Cataldo 2017). Recent literature has emphasized the importance of thinking about a region’s transportation network (Redding and Turner 2015) and incremental changes in road infrastructure (Gibbons et al. 2019), finding positive local effects from these changes on employment, the number of establishments, and, to a smaller extent, the productivity of incumbent firms. These studies show sizable local effects but they do not all identify the aggregate effects from these improvements’ impacts on the entire network. In a more recent paper, Zarate (2020) shows that informal workers are more responsive to transportation costs than are their formal counterparts and that therefore the former tend to work closer to their residences. As a result, investment in transportation infrastructure in Mexico City reduced informality by increasing access to formal jobs, which tend to be concentrated in in the city center and thus are inaccessible to workers who live on the periphery.

Evidence is more mixed on the effectiveness of direct subsidies or discretionary grants from the government to firms in disadvantaged areas. These grants aim to support employment at individual firms or to attract new employers to an area. The two key concerns with these programs are that they finance activities that recipient firms would have undertaken anyway and that the new activity in the targeted areas comes at the cost of activity displaced from nontargeted areas. Some studies suggest that subsidies, if well designed, increase local employment, mainly at small firms. This increase, in turn, can generate positive multipliers (i.e., additional jobs) by increasing productivity (Greenstone, Hornbeck, and Moretti 2010) or demand for local goods and services. Estimates from the United States and the EU suggest that each job in a tradable sector creates between 0.5 and 1.5 extra jobs in nontradable sectors (Ehrlich and Overman 2020). But not all evidence is as encouraging. First, positive local effects may be offset by general equilibrium effects in the form of higher wages and prices. Second, some programs show evidence of substantial deadweight and displacement of existing jobs (Bronzini and de Blasio 2006). This evidence is particularly strong concerning enterprise zones, which some countries have moderated by requiring that supported firms demonstrate that they do not predominantly serve local markets and by requiring a certain percentage of workers in the zones to live locally (see, for example, Mayer, Mayneris, and Py [2017] and Neumark and Simpson [2015]).

Decisions about public sector employment, including the relocation of large public agencies to depressed areas, can also affect the spatial allocation of employment. Evidence suggests that public sector jobs have positive multiplier effects on employment in services and that the relocation of large public agencies has positive effects on overall local employment (Faggio and Overman 2014). However, more recent evidence points to negative effects of such moves on private sector employment in manufacturing (What Works Centre for Local Economic Growth 2019). Note that general national-level policies, such as funding for schools or training or even a nationwide minimum wage, also affect spatial disparities.