An agenda for the Federal Reserve’s review of its monetary policy framework


An agenda for the Federal Reserve’s review of its monetary policy framework


Getting the goal right changes everything for economic development

Traditionally, state and local economic developers in the United States have focused on one overriding goal: job growth. At a time when the nation is confronting growing income inequality, and voters are demanding that public policy deliver real increases in their standard of living, Amy Liu’s essay, “Remaking Economic Development,” challenges U.S. economic developers to rethink their goals. Economic developers should respond by redefining their goal as “inclusive growth”: improving the well-being of all local workers.

My 30 years of research on state and local economic development policies has addressed the key issue of who these policies actually benefit, and especially how they affect workers’ incomes. As I have argued in the past, job growth—a commonly cited metric for success—is only one possible means to a more important goal: increasing local income per capita for a broad range of local workers. Economic developers must be concerned with not just job growth, but with who gets the new jobs and what the jobs pay.

Job growth in some local economies may almost automatically produce broad worker gains, but in other local economies may fall short without other accompanying policies. As Liu argues, raising incomes broadly will often require both policies that raise local productivity, such as cluster strategies, and efforts to link distressed neighborhoods and workers with jobs.

For example, my previous research, which has shown that job growth’s effects on local employment rates depend on the initial local unemployment rate, demonstrates that job growth alone will not always reliably help the local unemployed. When local unemployment is initially low, fewer new jobs will go to the local unemployed, and more will go to in-migrants.

On the other hand, in local economies with low initial unemployment, job growth has greater effects in increasing wages. But while this helps local workers in the short-run, the increased business costs due to higher wages will discourage some future job growth, partially offsetting the initial new jobs.

In an initially low-unemployment local economy, attracting new jobs has more effect on the mix of local jobs than the long-run job total. In such a local economy, we must address two key policy issues: whether these new jobs pay better than average and whether these new jobs can be accessed by disadvantaged and discouraged workers who might initially be considered to be “out of the labor force,” even in a low unemployment economy.

Focusing on broadly increasing per capita income also helps us realize that local economic development policies are labor market policies. The main way to increase local per capita income is to increase the proportion of the local population that is employed, and their hourly wage rates. These labor market outcomes depend on labor demand and labor supply.

Therefore, local economic development should include strategies to increase human capital. Job training and education policies that boost the quality of local labor supply will attract and grow more and better jobs, thereby helping local residents by both increasing their odds of being employed and increasing their wages.

As I have argued in two books (“Investing in Kids” and “From Preschool to Prosperity“), one cost-effective local economic development policy is early childhood education. High-quality preschool and child care boost the quality of local labor supply in the long-run, by increasing the adult skills of the former child participants. Early care and education programs also boost the local economy in the short-run, by allowing parents to work or go to school. High-quality early care and education programs will increasingly become location factors that parents will consider in deciding what community best meets their family’s needs. Due to effects on both parents and former child participants, early childhood education can increase local earnings per capita, for each dollar invested, by over $5.

Focusing economic development on inclusive growth, which benefits all, broadens our policy vision. Policies must be concerned with who gets jobs and the quality of jobs, not just raw job numbers. And policies must be concerned with growing the quality of the local workforce, not just hoping that the local workforce can access the available jobs.