Incentivizing the Missing Middle: The Role of Economic Development Policy
32 Pages Posted: 23 Apr 2019
Date Written: March 2019
The rise in inequality in the U.S. is, in part, attributable to the shrinking middle class; yet, this phenomenon is remarkably heterogeneous across places. State and local policy-makers use economic development incentives to promote local economic growth, and, presumably, provide employment opportunities. However, incentives may have unintended consequences. We combine detailed industry-level detail on incentives with proprietary county-level industry employment data and two methods for defining to middle class industries in instrumental variable regressions to explore how differential economic development policies affect middle class jobs. We find evidence that incentivizing creative-class and high-wage industries may be contributing to the hollowing out of the middle class; that targeting working and middle-class industries alleviates this trend without hurting employment in other industries; and that raising net taxes or reducing incentives on creative-class and high-wage industries could help increase working and middle-class employment without affecting employment in other industries.
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