Why prioritizing distressed labor markets for programs that create jobs is even more important than we previously thought
By Tim Bartik and Kathleen Bolter
Some places benefit more from job creation than others.
In distressed labor markets – that is, places where rates of employment are relatively low – it is easier for employers to find new workers locally than in places where more people already have jobs. As a result, job creation in distressed places produces greater increases in local employment rates than job creation in non-distressed places does.
These increased employment rates not only benefit the residents of the distressed place, but also push up employment rates nationally. Policymakers – at the national, state, and local level - should take these benefits into account in deciding which places to target for job creation.
What is a Commuting Zone (CZ)?
Researchers often use commuting zones (CZs) to analyze local economies. While most Americans (75%) live and work in the same county, one in four workers commutes to a job in a different county. Because of these commuting patterns, county boundaries do not always fully capture the local economy and where jobs are available to residents.
Workers in one county may benefit from job creation in a neighboring county through commuting. Even if a worker does not commute across county borders, job creation in the neighboring county could indirectly affect them by creating job vacancies locally. This is because the movement of other workers to new jobs in a nearby county will create openings in their previous positions.
To capture these cross-border labor market effects, researchers sometimes use CZs, which are geographic areas made up of multiple counties defined by people’s patterns of commuting for work. CZs reflect the local economy where people both live and work, which helps to give a more accurate picture of what happens when a local area adds jobs.
Geographically, economic distress can manifest in different ways
Like any other unit of geography, CZs can be distressed, meaning they have low levels of employment (below 77%) for workers between the ages of 25 and 54. Employment rates for this age group are important because these are prime ages where individuals are typically either working or looking for work. Not having a job during this time in one’s life is associated with many negative life outcomes, not just for the individual, but for their family and the surrounding community.
Because CZs are comprised of counties there are several ways that economic distress can manifest. First, the entire CZ may be distressed. This is the case for the CZ containing Fresno, California, where the prime-age employment rate in the commuting zone ranges from a low of 65% in Tuolumne County and Madera County to a high of 72% in Stanislaus County. All the counties that comprise the Fresno CZ have low prime-age employment rates and are considered distressed or severely distressed.
Another way distress can manifest is by having pockets of distressed counties within the CZ. For example, the CZ containing Detroit, Michigan, has Livingston County, Washtenaw County, and Oakland County where the prime age employment rate is above 80%, meaning they are close to full employment. However, Wayne County and Jackson County have prime-age employment rates around 70%, meaning they are severely distressed. In Detroit, not all the counties in the CZ are distressed, but the divergence between counties represents uneven employment opportunities within the CZ.
Why should policymakers target job creation to more distressed CZs?
There are different ways that jobs can be targeted within CZs that produce different outcomes.
First, imagine a scenario where all counties within the CZ have identical employment rates and levels of economic distress.
Within this context, there is a spectrum of CZs: one characterized by distress, marked by low prime-age employment rates; another representing the average, with prime-age employment rates in the middle range; and finally, a thriving CZ boasting high prime-age employment rates.
Now, let’s say ten jobs paying $60,000 a year are created in each CZ and uniformly dispersed across the counties.
These ten jobs have a direct effect on local earnings simply because they didn’t exist before. These ten jobs also create a ripple effect on local earnings by having multiplier effects as additional jobs are created in local suppliers and retailers. Finally, both the direct jobs and the multiplier jobs may have effects on local employment rates and hence local earnings per capita, due to residents having an easier time finding jobs.
Research shows that employment rate and earnings effects are much greater when these ten jobs are created in a distressed CZ than when they are created in a CZ that is better off. Overall, the additional annual local earnings benefit resulting from ten jobs paying $60,000 a year each, due to a higher employment rate, is more than three times greater in the distressed CZ compared to the average CZ. However, creating jobs in the Booming CZ leads to a negative impact because those jobs will likely need to people to move to the area to fill them, therefore driving up the cost of living and reducing the gains from adding these jobs.
There are several reasons why job creation pays off more in distressed CZs. First, compared to better-off CZs, distressed CZs may have a higher number of non-employed residents who are readily employable and can be hired to fill job vacancies. Second, distressed CZs might possess a greater capacity to absorb a sudden increase in demand for workers without experiencing a significant surge in property prices, local prices, and business expenses. As a result, job creation has a bigger impact on both overall employment levels and employment rates within distressed CZs.
Why should policymakers target job creation to distressed counties regardless of the distress level of the CZ?
In a second scenario, imagine the employment rates differ between counties in the CZ, with one county more distressed than the other. This time, those ten $60,000 a year jobs are created only in the more distressed county.
In this scenario, the extra earnings gained from ten jobs with a yearly salary of $60,000 each are over twice as much in the distressed CZ compared to the average CZ. Contrasting the distressed CZ with the booming CZ, the additional earnings skyrocket to eight times higher.
The specific targeting of job creation also affects the individual counties within the CZ. It may not be surprising that targeting the more distressed county within the CZ leads to greater increases in that county’s employment rates and hence that county’s earnings. But there is also a more surprising finding: targeting the more distressed county in a CZ increases the overall effect of job creation on average CZ employment rates and earnings. The gains to the distressed county exceed any losses to the CZ’s non-distressed counties.
Targeting job creation in the more distressed county could boost overall employment rates by leading to the hiring of more residents who are currently unemployed. In contrast, job creation in non-distressed counties is more likely to lead to in-migration from outside the CZ. Also, directing job opportunities to the distressed county, rather than spreading them across both distressed and non-distressed areas, might help keep local prices, wages, and expenses from rising too quickly. Job creation in less-distressed counties is more likely to lead to higher local costs, which will reduce the multiplier effects of the initial job creation. Overall CZ earnings growth is boosted by targeting the CZ’s more distressed counties.
Lessons for the design of job creation policies
Targeting local job creation in distressed local labor markets is even more important than previously thought. When employment rates increase, the beneficial effects are much greater when the employment gains are concentrated in distressed CZs than if they are in average or booming labor markets.
Targeting job creation on distressed counties is important, too. Job creation in distressed counties consistently yields better returns than job creation in non-distressed areas, regardless of the overall distress level of the CZ. Policymakers should focus job creation policies on distressed places, both within and across local labor markets, to maximize both social and economic benefits.
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