Incentive packages for private businesses have become the modus operandi among state and local governments competing for large-scale corporate relocations and new branch plants—bringing the promise of increased employment and tax revenue. But incentives are also widely criticized, with scholars and practitioners equally frustrated by their limitations and costs.
As private businesses increasingly demand incentive payments to locate or remain within a region, economic developers have responded with efforts to make incentive payments more effective by using a mix of more sophisticated analytical tools, integrating incentives within broader sectoral or industrial targeting strategies or adding additional checks to curb excessive incentive use.
New data sources create the possibility to study some of these moderating steps and explore their varying effect on incentive performance. A new study by Mary Donegan, T. William Lester and Nichola Lowe presents the results of a national, time-series, establishment-level study of state and local economic development incentive deals, comparing establishments (firms that operate from a single physical location) that received an incentive package to a comparison group of similar, non-incentivized establishments.
While incentives can be used to stimulate a range of economic outcomes, they are most frequently used with job creation and job retention goals in mind. This new analysis focused on employment effects of incentivized economic development deals by using three national databases: the Good Jobs First Incentive Database, the National Establishment Time-Series database, and the State Economic Development Expenditure Database from the Council for Community and Economic Research. Combining these data sources, the researchers sought to answer three interrelated questions:
- First, do establishments that receive incentives outperform non-incentivized firms?
- Second, does prioritizing incentives to establishments within a region’s targeted or specialized industries enhance the efficacy of the incentive?
- Finally, do states with more balanced economic development “portfolios” (i.e., similar public investment in recruitment and entrepreneurship) make more effective use of their incentive dollars with respect to employment ends, when compared to those states with unbalanced portfolios?
The researchers hope their findings will inform critical policy debates surrounding economic development incentives. In this first nationwide study with a causal research design, the authors provide new empirical evidence that shows that economic development incentives, on average, fail to produce new employment opportunities.
By comparing incentivized establishments to a carefully selected control group, the study casts doubt on the biggest claim made by incentive proponents— that “but for” the incentive payment, job creation would not occur. This simple but direct finding—that incentives do not create jobs—should prove critical to policymakers.
However, the study also shows how incentives can be more effective by examining the disparate impacts by firm size. Here, the researchers found that incentives granted to smaller establishments have better performance in terms of job creation compared to very large establishments, which were found to have starkly negative employment effects.
Finally, the study shows that these large negative impacts for larger establishments are mitigated in states that “balance” their economic development spending portfolios between traditional business attraction activities and support for entrepreneurial development.
Mary Donegan is an assistant professor-in-residence at the University of Connecticut who received her doctorate in city and regional planning from The University of North Carolina at Chapel Hill. T. William Lester and Nichola Lowe are associate professors of city and regional planning at UNC-Chapel Hill and CURS Faculty Fellows.
This CURS-supported project received funding from the Ewing Marion Kauffman Foundation.