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Place-Based Policies NBER WORKING PAPER SERIES PLACE-BASED POLICIES David Neumark Helen Simpson Working Paper 20049 http://www.nber.org/papers/w20049 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 April 2014 We are grateful to Gilles Duranton, Vernon Henderson, Patrick Kline, Stephen Ross, Kurt Schmidheiny, and Will Strange for very helpful comments.The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2014 by David Neumark and Helen Simpson. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Place-Based Policies David Neumark and Helen Simpson NBER Working Paper No. 20049 April 2014, Revised August 2014 JEL No. H23,H71,J23,J38,R12 ABSTRACT Place-based policies commonly target underperforming areas, such as deteriorating downtown business districts and disadvantaged regions. Principal examples include enterprise zones, European Union Structural Funds, and industrial cluster policies. Place-based policies are rationalized by various hypotheses in urban and labor economics, such as agglomeration economies and spatial mismatch – hypotheses that entail market failures and often predict overlap between poor economic performance and disadvantaged residents. The evidence on enterprise zones is very mixed. We need to know more about what features of enterprise zone policies make them more effective or less effective, who gains and who loses from these policies, and how we can reconcile the existing findings. Some evidence points to positive benefits of infrastructure expenditure, and also investment in higher education and university research – likely because of the public-goods nature of these policies. However, to better guide policy, we need to know more about what policies create self-sustaining longer-run gains. David Neumark Department of Economics University of California at Irvine 3151 Social Science Plaza Irvine, CA 92697 and NBER [email protected] Helen Simpson Department of Economics University of Bristol 8 Woodland Rd Bristol, BS8 1TN United Kingdom [email protected] 1. INTRODUCTION Broadly speaking, place-based policies refer to government efforts to enhance the economic performance of an area within its jurisdiction, typically in the form of more job opportunities and higher wages. Best known, perhaps, are place-based policies that target underperforming areas, such as deteriorating downtown business districts, or within the European Union, relatively disadvantaged areas eligible for regional development aid. Alternatively, place-based policies may seek to enhance even further the economic performance of areas that are already doing well. Ladd (1994) distinguishes a subset of place-based policies or strategies that she labels “place- based people strategies.” These are policies that are geographically targeted, but with the intent and structure of helping disadvantaged residents in them – for example, enterprise zone programs that seek to create jobs in or near areas where poor people live and job prospects are weak. In contrast, some place- based policies target areas irrespective of whether there are disadvantaged people living in those areas, or even many people at all, such as efforts to revitalize a downtown business district including real-estate development, or initiatives to help strengthen an industrial cluster in a region. Place-based people strategies, in particular, can be contrasted with “people-based” policies that try to help the disadvantaged without regard to where they live or how concentrated they are. Examples include welfare and working tax credits (such as the Earned Income Tax Credit in the United States). People-based policies are the more traditional purview of public finance, and are not covered in this chapter. Rather, the chapter focuses on a wide range of place-based policies – including pure place-based policies as well as place-based people policies. Place-based policies that also focus on people can be categorized as direct or indirect. Direct forms of place-based policies seek to increase economic activity and strengthen labor markets where disadvantaged people currently live, while indirect policies may instead seek to increase access of those people to locations where labor markets are stronger. Enterprise zones can be viewed as direct, since they typically create incentives for hiring, or economic activity more generally, in or near areas where disadvantaged people live. The Gautreaux and Moving to Opportunity programs in the United States, as well as transportation-based policies intended to increase access to jobs outside of areas where the disadvantaged tend to reside (in the United States, the urban core) – that is, intended to reduce spatial mismatch – are examples of indirect policies. This chapter focuses on direct policies.1 Place-based policies targeting the disadvantaged, including indirect policies, are often rationalized in part by hypotheses that seek to explain the overlap between areas with poor economic 1 There are many excellent summaries of the details of both the Gautreaux and MTO program designs, and a number of comprehensive reviews of findings of studies of either or both programs; see, e.g., Duncan and Zuberi (2006), Rosenbaum and Zuberi (2010), and Ludwig et al. (2013). 1 performance and disadvantaged residents, coupled with market failures of one form or another. The standard arguments considered in the urban economics literature to rationalize pure place-based policies are generally efficiency arguments pertaining to the existence of agglomeration externalities. But this literature also calls into question whether policies that aim to stimulate economic activity in one place rather than another deliver any aggregate benefits, and whether place-based people policies will ultimately help those individuals they target. In our view, other market imperfections that have been highlighted in the labor economics literature may also justify place-based policies of both types. One is the spatial mismatch hypothesis, according to which minorities or low-skilled workers in some urban areas may face long-term disadvantage spurred by declines in employment opportunities as manufacturing jobs left the cities, coupled with housing discrimination or other constraints that restrict their mobility to locations with better employment opportunities. A second is positive externalities stemming from network effects, whereby employment of residents can help other residents find jobs (e.g., Hellerstein et al., 2011). Either the externalities from network effects or the mobility constraints implied by spatial mismatch can potentially justify geographically targeted policies to increase employment. This chapter reviews evidence on these labor-market hypotheses that can potentially rationalize place-based policies, with a more cursory discussion of the standard urban economics hypotheses regarding agglomeration and spillovers, on which plenty of work already exists. The majority of the chapter focuses on the research evidence on impacts of place-based policies, and discusses issues arising in the empirical identification of causal effects in this setting.2 In the remainder of this introduction, we provide more detail on the types of place-based policies we consider, and emphasize the intended recipients and the stated goals of these policies. Later in the chapter, in both the context of the theoretical basis for these interventions and the evidence on their effects, we consider whether these goals are met. Due to space constraints, we limit our coverage throughout to place-based policies in the United States and in Europe. This focus allows us to contrast evidence on similar types of policies implemented in both locations, and where the evaluation literature has examined comparable outcomes using similar empirical approaches, enables us to draw conclusions that are more general. In turn, this means that we necessarily exclude interventions in developing countries, such as Special Economic Zones in China (see Wang, 2013 and Alder et al., 2013) and India’s National Manufacturing and Investment Zones. 2 Kline and Moretti (forthcoming) provide a very useful complementary review article on place-based policies, which focuses largely on a theoretical discussion of the welfare economics of local economic development programs, with a very limited discussion of the evidence. In contrast, our goal is to provide a comprehensive overview and evaluation of the evidence base. 2 We also exclude policies that result from political or fiscal decentralization and which apply across whole jurisdictions (and, therefore, without regard to the characteristics of the areas where the incentives apply, or the people who live in them), rather than to areas within a jurisdiction. Examples include discretionary programs, such as the Michigan Economic Growth Authority (MEGA) program, which provides tax credits to businesses in the state’s export industries (Bartik and Erickcek, 2010), and broader policies on which jurisdictions may compete to attract businesses. There is large literature on tax competition between areas to attract firms – such as through research
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