3 min read.Updated: 13 Dec 2020, 10:43 PM ISTDani Rodrik
Tailored training plans that are run by local leaders might work better than offering tax breaks
The covid pandemic will leave the US economy with a deeply scarred labour market. More than 20 million jobs have been lost, and only half have been regained. Not surprisingly, job losses have hit disadvantaged and less educated workers especially hard.
This aggravates a pre-existing trend. Long before the pandemic, the US labour market was becoming increasingly polarized. Good, middle-class jobs had been disappearing for decades, owing to automation, deindustrialization, global competition, and the advent of the “gig economy".
To restore the health of America’s economy, society, and polity, President-elect Joe Biden’s administration must answer a straightforward question: “Where will the good jobs come from?"
Good jobs require specific skills and can be created only by productive firms. Creating good jobs in ample quantities requires addressing both the supply and demand sides of the problem.
On the supply side, workers must be equipped with the hard and soft skills that productive firms require. On the demand side, there must be a large enough segment of smaller and medium-size firms that are both productive and able to expand employment.
Markets alone will not solve the problem. Governments at all levels must be actively involved. The good news is that we have considerable evidence about the type of programmes that work.
On the skill-building front, so-called “sectoral training" programmes have been especially successful. These go beyond traditional training: they are tightly coordinated with employers and provide skills customized to the needs of specific industries, such as health care or information technology. Workers enrolled in the programmes receive a variety of “wrap-around" services, ranging from childcare to job placement.
The best known of these programmes is Project QUEST in San Antonio, Texas, in operation since the 1990s. There are many others that operate on the same model. Such sectoral training schemes have been shown to increase disadvantaged workers’ earnings by more than 20% on average at a relatively low cost.
Likewise, we have considerable experience on the demand side to guide us. Tax incentives and open-ended investment subsidies can attract firms to lagging regions, but they are not particularly effective. They are expensive and often waste public resources on projects that would have been realized anyway.
What works much better, as Tim Bartik of the W.E. Upjohn Institute for Employment Research has shown, is to provide customized business or infrastructure services to local firms. Tailored to [their] needs, assistance of this kind can help them become more productive and expand employment capacity by overcoming the constraints they face. These programmes require building relationships between local firms and prospective investors.
The bad news is that these successful worker and firm-centred initiatives currently operate at a very small scale. Sectoral training programmes are typically operated by community groups or non-governmental agencies, and limited funding, as well as a lack of interest from state agencies, prevents them from being scaled up. As a result, the workers they serve number in thousands instead of the millions that need to be reached.
Similarly, customized business service programmes are severely underfunded. Bartik estimates that firms receive $47 billion annually in state and federal tax incentives for investment. By contrast, total annual spending on customized training and manufacturing extension services, which is far more effective in terms of job creation, amounts to only around $1 billion.
A second problem is that programmes that are centred on workers and firms are often not well coordinated. Even though sectoral training programmes are built around a “dual-customer" approach, their ability to influence firms’ employment policies remains limited. Firm-centred policies can overlook local employment needs if they focus on other objectives, such as innovation through new technologies.
Effective programmes to create good jobs are tailored to specific communities’ needs and must be driven by local leadership. But the federal government can also play a major role. It can underwrite a massive boost in funding and encourage states and localities to engage in more experimentation. There is thus a huge opportunity here for the Biden administration.
Biden has promised to raise the federal minimum wage and to encourage greater unionization. Beyond these, his plans rely heavily on tax incentives. Companies that increase employment in the US would get tax credits, while those that invest abroad and boost imports would face tax penalties. He also intends to increase spending on goods made domestically and on government research and development.