Non-tax incentives for business growth promote capital investment over jobs

Using tax abatements, financial incentives, and public investments to attract (or retain) firms is the primary economic development tool for many local governments. Often local job creation policies focus on increasing capital through grants, low-interest financing, and other economic development incentives. Theory predicts that capital subsidies induce firm behaviors that limit their job creation effects.

In a recent Upjohn Institute working paper funded by the Institute's ECRA program, Carlianne Patrick of Georgia State University employs the Incentives Environment Index, constructed from state constitutional provisions that limit and structure the ability of state and local governmental entities to aid private enterprises, and five-year county panels to test theoretical predictions on county capital expenditure and input mixes as well as industry establishment shares. The results indicate the act of increasing capital subsidy tools is associated with capital-labor substitution, decreased employment density, and changes in local industry mix.

Read Jobless Capital? The Role of Capital Subsidies, by Carlianne Patrick.

Research Topics: Regional Policy & Planning