Place based policies : Theory and empirical evidence

1. Place basedpolicies: Theory and empiricalevidence Florian Mayneris Université catholique de Louvain September 2012

2. Spatial disparities are hugebetweenregions…

3. …but alsowithincities Brussels Paris

4. Why do economicactivities and people agglomerate? • Economicgeography: increasingreturns to scale in production and transport costs • Incentive to locateactivities in a few places, to better exploit scaleeconomies, and preferably close to demand, to save on transport costs • Urbaneconomics: • Externaleconomies of scale: existence of benefits for firmsfrombeinglocated in the sameneighborhoods (externalities) • Clusters ( like Hollywood for cinema, or SiliconValley for software/IT industry) • Segregationmechanisms: self-reinforcing spatial sortingmechanisms of people withincities, whichleads to equilibriawithpoor people in some districts withlowamenities and rich people in someother districts with good amenities

5. 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)

6. Theoreticalframework: The spatial equilibrium • In urbaneconomics, generally 3 marketsrepresented: labour market, housingmarketand final good market • Spatial equilibrium: supplyequalsdemand on all markets and nobody has anyincentive to change locations • Threeequilibrium conditions: • profit-maximizingfirmspaywagesequal to marginal productivity of workers • price of a house equalsits marginal cost (including land and legalcosts) • real wages must beequalacross places • Last condition holds due to the assumption of perfectmobility of workers(no migration costs) • There is no free lunch: High wages are compensated by highprices (housing and/or consumptiongoods) and/or lowamenities!

7. Is the spatial equilibriumempiricallyverified? • No way to test directlywhether an economyisspatiallyatequilibrium • Empiricalevidencethatspatial equlibriummechanisms are atplay: • Strong and robust positive correlationbetweenwages and density/marketacces (Combes et al. 2008, Head and Mayer, 2004, Glaeser and Mare, 2001…) • Strong and robust positive correlationbetweenhousingcosts and density (Partridge et al., 2009, Combes et al., 2012…) • Final goods are more expensive in denser areas (Tabuchi, 2001, Suedekum 2006…) • Amenitiesnegativelycorrelatedwithwages (Roback, 1982; Gyourkond Tracy, 1989 etc.) • High wagescompensated, at least partly, by highprices and/or lowamenities • On the opposite, lowwages/lowincomecompensated by lowerprices and/or higheramenities

8. Spatial equilibrium and public policies • Doesevidence about the existence of spatial equilibriummechanismsimplythat public policies in favour of low-income areas are unnecessary? NO • Severalassumptions in thisframeworkproblematicfrom 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 wagedifferencesacrossregions, not truethat migrations allow to reachequilibriumautomatically • Workers are not homogeneous in terms of human capital:Some people very far frombeing employable in terms of skills • Existence of bothlabour marketdiscriminitionand spatial segregation of discriminated populations

9. What type of policies for lowincome/highunemployment places? • Is bringingfirms/jobs to lowincome/highunemployment places the solution to fightpoverty in someregions? • Not necessarily: • Difficulty to displacefirms, due to strongagglomeration forces • Possible capture of the gains by non-targeted people • Attractingfirmsdoes not meancreating jobs for local residents

10. Do regionalpoliciessucceed in displacingfirms? • Aim of manyplace-basedpolicies = Attractingfirms in laggingregions/areas • Impact oftenshown to benull or modest: • Crozet et al. (2004): almost no impact of EU structural funds and French subsidies in favour of laggingregion, on the location of foreigninvestments in France • Devereux et al. (2007): small positive impact of RegionalSelective Assistance in UK on plants’ location decisions • Impact of suchpolicies all the more positive that the number of plants alreadylocated in targeted areas ishigh (Devereux et al., 2007 for RSA, Mayer et al., 2012, for French enterprise zones) • Attractingfirms in areas wherethey do not want to go is hard! • Agglomeration forces are strong and difficult to counterbalance

11. Whoactually gains fromplace-basedpolicies? • Whenplace-basedpoliciessucceed in attracting new activities in targeted places, need for: • Additional buildings/land • Additionalworkers • In case of inelastic land and/or labour supply, the benefits of place-basedpolicieswillcapitalizeinto land prices and/or wages of workersalreadyemployed • In the case of California, increase of commercial property values by 6% (Burnes, 2012) • Important issue • Land-owners and/or incumbentworkers are not necessarily the populations targeted by thesepolicies • If production costsincreasetoomuch, employmenteffects of policiesmightbelow

12. Doesattractingfirmsnecessarilycreate jobs opportunities for local unemployed people? • Idea of place-basedpolicies: if people cannot go to jobs, jobs must go to people • Case of the French urbanenterprise zones, in favor of deprivedsuburbs: • The policyissuccessful in increasing the number of firms and the number of jobs in targeted zones (Rathelot and Sillard, 2009; Mayer et al., 2012) • The policydoes not reallyreduce the unemployment rate of local residents (Gobillon et al., 2012) • Two possible explanations to this puzzle: • Some new firms arrive fromanother place, but withtheirownemployees • Firms do create new jobs, but do not hire local workers due to spatial mismatch • In any case, simplisticview to thinkthatattractingfirmsmeanscreating jobs for local residents!

13. Whatshouldwe do? • Place-basedpoliciesalone are verylikely to beinsufficient to improve living conditions of people in targeteddistressed areas • However, specificproblems of people living in someregions/districts cannotbeignored • Specificpolicies for people living in specific places, in terms of education or access to jobs • Intermediate solution betweenpeople-based and place-basedpolicies?