Monthly Archives: November 2015

First, Do No Harm

chicago010_16x9Over the past year, I’ve had the opportunity to interview several dozen regional leaders to discuss the biggest challenges they face in growing their economies. The challenge that comes up most often is “widening economic inequality.” But along with that response often comes a question. What is the role of economic development organizations in addressing this complex and seemingly intractable problem?

Nobody has come up with a clear answer to that question yet, in part because so many of the ideas floating around are based on anecdotes and fads rather than rigorous evaluation, making it difficult to distinguish promising approaches from all the noise. However, one good place to start would be for economic developers to take a step back and make sure that the strategies they are using to promote job growth are not making the inequality problem worse.

For example, focusing too much attention on growing high-tech jobs may be contributing to the problem. Studies by the Brookings Institution have found that regions with the highest concentrations of high-tech industries also have the highest levels of income inequality. One possible explanation is that while new high-tech jobs tend to be high paying, the jobs they spawn in the local economy tend to be relatively low paying, with a polarizing effect on the job market.

Another explanation is that placing too many bets on high-tech firms can foreclose on opportunities to support job growth in other industries that provide middle-skill jobs. A study of high-growth firms in the United Kingdom found that only 15 percent of high-growth firms are in high-tech industries. The rest are spread across a wide range of industries with much higher concentrations of middle-skill jobs.

Similarly, trying to grow jobs too fast may be making inequality worse. A study by the Fund for Our Economic Future found that the regions that have experienced the fastest growth have also experienced the most inequality. One explanation may be that accelerated growth is hard to sustain. Research by the Institute for Exceptional Growth Companies suggests that the faster a business grows in one period, the less likely it is to continue growing in subsequent periods, and the more likely it is to die.

That same research suggests that the biggest cumulative job gains come from businesses that manage to sustain incremental growth over time, and that these sustained growth businesses comprise a broader range of occupations than those in high-tech or knowledge-intensive industries, making them a more likely source for middle skill jobs, and a useful vehicle for rebuilding the middle class.

Third, putting too much emphasis on attracting talent from outside the region may be contributing to inequality. In too many places, a young, white, highly educated and highly mobile workforce has been layered on top of a resident population whose education and skills have not been adequately upgraded. A recent study by the Federal Reserve Bank of Philadelphia found that as this new gentry has settled into urban neighborhoods, housing has become less affordable, and low-income residents have become more concentrated in poorer areas with fewer amenities and fewer opportunities for advancement.

Finally, misusing financial incentives to attract and retain businesses may be getting in the way of solving the inequality problem. A recent study by Good Jobs First found that the bulk of financial incentives are being captured by the largest firms, which have actually been shedding jobs for the past decade, while programs to support smaller firms with much greater potential for job growth are starving for resources. In addition, the estimated $80 billion that state and local governments spend annually on incentives is crowding out investments in education, training, infrastructure and affordable housing that are critical to sustaining job growth and expanding opportunity more equitably.

Taken together, these examples suggest that there is a unique role that economic development organizations can play in combatting economic inequality. That is, to “first do no harm.”

Pete Carlson is president of Regional Growth Strategies