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2. The Nature and Importance of Local Economic Development Benefits, and How They Are Affected by Labor Demand and Labor Supply
- W.E. Upjohn Institute
- Chapter
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13 2 The Nature and Importance of Local Economic Development Benefits, and How They Are Affected by Labor Demand and Labor Supply What is local economic development in the United States? Should we care about local economic development? Why? What are local economic development’s benefits? Which of these benefits is most important ? What public policies best provide these benefits? By addressing these questions, this chapter provides a conceptual framework used throughout this book. To analyze local economic development, we must first define it. In the United States, state and local policymakers often define economic development as growth of employment, output, or population.1 For reasons I will give in a moment, a better definition of local economic development is growth in local per capita income. Most such growth is due to growth in local earnings per capita. The increase in local earnings per capita will be this book’s definition of local economic development benefits. Growth in local earnings per capita depends upon using local labor more productively. Unemployed labor can become employed, or employed labor can become employed in better jobs. Why focus on per capita income or earnings rather than total income or earnings? This focus makes sense because increases in per capita income or earnings are more reliable than increases in total income or earnings in delivering a variety of economic and social benefits. First, increases in per capita income or earnings correspond to some persons gaining income. Increases in total income or earnings that are due to population growth alone, with no per capita income or earnings growth, do not necessarily correspond to any individual person gaining income. A society that has per capita income growth is more likely to be a soci- 14 Bartik ety that offers expanded economic opportunity to a wide variety of its members. Second, increases in per capita income are more likely than increases in total income to improve the fiscal situation of state and local governments. The evidence suggests that most state and local public services are, in the long run, produced and delivered at the same average costs per person regardless of local population, beyond some minimum population (Fisher 1996; Inman 1979). Increasing population by itself provides few long-run fiscal benefits to state and local governments . Increasing per capita income allows an improvement in the state and local fiscal situation. The same public services can be financed with a lower ratio of state and local taxes to income, or higher levels of public services can be financed with the same ratio of state and local taxes to income. As will be discussed later in this chapter, fiscal benefits are not the largest benefit from improving local economic development. But they are a benefit. Third, increases in per capita income are more likely than increases in population alone to improve the quality of life in a local community. Higher-population communities are different from lower-population communities. Whether they are better is a matter of opinion. Higher per capita income is a more reliable way of improving the amenities of a local community. Crime is likely to be lower. Private as well as public services are likely to be better. Problems such as homelessness and poverty will be alleviated. Fourth, growth in per capita income is likely to improve the quality of political life in a community. As argued by Harvard economist Benjamin Friedman (2005), a community or nation with better growth in per capita income is more likely to be tolerant of different groups. Per capita income growth encourages more generosity toward the disadvantaged . It also encourages more support of environmental protection. Finally, growth in per capita income may encourage greater support for the democratic process. For all these reasons, increases in per capita income or earnings are a far better measure of economic success than increases in overall income or earnings. Such increases in per capita income and earnings can be accomplished by increases in the productivity with which local resources are used. [44.200.27.175] Project MUSE (2024-03-29 10:57 GMT) The Nature and Importance of Local Economic Development Benefits 15 Of course, increases in local job growth may cause increases in per capita income or earnings, since increases in local job growth may raise local employment-to-population ratios (local employment rates) or raise local wages. These possibilities are explored further later in this chapter. WHAT IS LOCAL ECONOMIC DEVELOPMENT POLICY? If local economic development is increasing local per capita income...