History of governments competing over jobs using incentives lends perspective on bid for Amazon HQ2

What are the long-run labor market impacts of these policies on local communities?

by Dan Paley | Nov. 2, 2017

Some 238 cities and regions across North America have submitted proposals to Amazon for its second headquarters. The number of applicants underscores the interest in the contest and with good reason: The world’s largest online retailer plans to invest more than $5 billion and create up to 50,000 jobs.

Included in the bids from cities and states are billions of dollars in tax breaks and credits. But what are the long-run impacts of winning such a business? How will it affect the local communities? In short, is it worth it?

“This bidding war…continues a long tradition of governments competing over jobs using tax and other incentives,” according to ESSPRI affiliate Matthew Freedman in a recent blog post for LSE’s US Centre blog. Indeed, local governments’ efforts to encourage economic growth through such mechanisms has a long history. Freedman’s work, published in this month’s issue of the Journal of Urban Economics, looks at the use of industrial policy in 1930’s Mississippi to attract businesses. In that case, as a result of Mississippi’s Balance Agriculture With Industry (BAWI) Program, the “first systematic state-sponsored program aimed explicitly at attracting businesses using government subsidies,” 13 large manufacturing plants established operations in the state between 1936 and 1940. The program allowed cities and counties to “purchase land, build manufacturing facilities, and rent those facilities out at low cost to private companies.”

Freedman’s research finds that the “counties that received these plants experienced an over 15% increase in female labor force participation on average in the short run. Moreover, these effects persisted decades into the future, well after many of the original companies shut down.”

His results shed some light on the current development policy landscape and lend perspective on the potential long-run labor market impacts of these policies on local communities.

To find out more read the blog post here, or read the paper in the Journal of Urban Economics here.

To learn more about ESSPRI, visit esspri.uci.edu