Place based policies: Theory and empirical evidence

Florian MaynerisUniversité catholique de Louvain

September 2012

Spatial disparities are huge between regions…

…but also within cities

Brussels Paris

Why do economic activities and people agglomerate?

• Economic geography: increasing returns to scale in production and transport costs

Incentive to locate activities in a few places, to better exploit scale economies, and preferably close to demand, to save on transport costs

• Urban economics: - External economies of scale: existence of benefits for firms from being located in

the same neighborhoods (externalities) Clusters ( like Hollywood for cinema, or Silicon Valley for software/IT industry)- Segregation mechanisms: self-reinforcing spatial sorting mechanisms of people

within cities, which leads to equilibria with poor people in some districts with low amenities and rich people in some other districts with good amenities

Spatial disparities as object of concern for policy-makers

• Desire of policy makers to smooth spatial disparities

• Public policies in favour of specific regions or neighbourhoods in many countries (US, France, Japan, UK, Italy, Russia etc.)

Place-based policies: policies that explicitly target specific regions • Different types of policies: - incentives to attract firms in specific places (cluster policies, enterprise zones)- transport infrastructure (structural funds within EU)- housing/urban renovations

• Rationale for these policies:- Equity/Egalitarianism: equity/equality between people necessitates equity/equality between places- Market failures: some places have the potential to grow but coordination failure

• Economists generally sceptical about such policies (see Glaeser and Gottlieb, 2008)

Theoretical framework: The spatial equilibrium

• In urban economics, generally 3 markets represented: labour market, housing market and final good market

• Spatial equilibrium: supply equals demand on all markets and nobody has any incentive to change locations

• Three equilibrium conditions: - profit-maximizing firms pay wages equal to marginal productivity of workers- price of a house equals its marginal cost (including land and legal costs)- real wages must be equal across places

• Last condition holds due to the assumption of perfect mobility of workers (no migration costs)

There is no free lunch: High wages are compensated by high prices (housing and/or consumption goods) and/or low amenities!

Is the spatial equilibrium empirically verified?

• No way to test directly whether an economy is spatially at equilibrium

• Empirical evidence that spatial equlibrium mechanisms are at play:- Strong and robust positive correlation between wages and density/market acces

(Combes et al. 2008, Head and Mayer, 2004, Glaeser and Mare, 2001…)- Strong and robust positive correlation between housing costs and density

(Partridge et al., 2009, Combes et al., 2012…)- Final goods are more expensive in denser areas (Tabuchi, 2001, Suedekum 2006…)- Amenities negatively correlated with wages (Roback, 1982; Gyourko nd Tracy, 1989

etc.)

High wages compensated, at least partly, by high prices and/or low amenities On the opposite, low wages/low income compensated by lower prices and/or

higher amenities

Spatial equilibrium and public policies

• Does evidence about the existence of spatial equilibrium mechanisms imply that public policies in favour of low-income areas are unnecessary? NO

• Several assumptions in this framework problematic from an empirical point of view

• People are not perfectly mobile in all countries: In case of low labour demand in an area, or of real wage differences across regions, not true that migrations allow to reach equilibrium automatically

• Workers are not homogeneous in terms of human capital: Some people very far from being employable in terms of skills

• Existence of both labour market discriminition and spatial segregation of discriminated populations

What type of policies for low income/high unemployment places?

• Is bringing firms/jobs to low income/high unemployment places the solution to fight poverty in some regions?

• Not necessarily:1) Difficulty to displace firms, due to strong agglomeration forces2) Possible capture of the gains by non-targeted people 3) Attracting firms does not mean creating jobs for local residents

Do regional policies succeed in displacing firms?

• Aim of many place-based policies = Attracting firms in lagging regions/areas

• Impact often shown to be null or modest:- Crozet et al. (2004): almost no impact of EU structural funds and French subsidies in

favour of lagging region, on the location of foreign investments in France- Devereux et al. (2007): small positive impact of Regional Selective Assistance in UK

on plants’ location decisions

• Impact of such policies all the more positive that the number of plants already located in targeted areas is high (Devereux et al., 2007 for RSA, Mayer et al., 2012, for French enterprise zones)

Attracting firms in areas where they do not want to go is hard! Agglomeration forces are strong and difficult to counterbalance

Who actually gains from place-based policies?

• When place-based policies succeed in attracting new activities in targeted places, need for:

- Additional buildings/land- Additional workers

• In case of inelastic land and/or labour supply, the benefits of place-based policies will capitalize into land prices and/or wages of workers already employed

- In the case of California, increase of commercial property values by 6% (Burnes, 2012)

• Important issue - Land-owners and/or incumbent workers are not necessarily the populations targeted

by these policies- If production costs increase too much, employment effects of policies might be low

Does attracting firms necessarily create jobs opportunities for local unemployed people?• Idea of place-based policies: if people cannot go to jobs, jobs must go to people

• Case of the French urban enterprise zones, in favor of deprived suburbs:- The policy is successful in increasing the number of firms and the number of jobs in

targeted zones (Rathelot and Sillard, 2009; Mayer et al., 2012)- The policy does not really reduce the unemployment rate of local residents (Gobillon et

al., 2012)

• Two possible explanations to this puzzle:- Some new firms arrive from another place, but with their own employees- Firms do create new jobs, but do not hire local workers due to spatial mismatch

In any case, simplistic view to think that attracting firms means creating jobs for local residents!

What should we do?

• Place-based policies alone are very likely to be insufficient to improve living conditions of people in targeted distressed areas

• However, specific problems of people living in some regions/districts cannot be ignored

• Specific policies for people living in specific places, in terms of education or access to jobs

Intermediate solution between people-based and place-based policies?