
                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: SUNDAY, May 15, 1994                   TAG: 9405180008
SECTION: EDITORIAL                    PAGE: B-3   EDITION: METRO 
SOURCE: ADRIENNE M. BIRECREE
DATELINE:                                 LENGTH: Medium

INCENTIVES DON'T ALWAYS PAY OFF

TRADITIONAL approaches to job creation - creating ideal business conditions, offering incentives such as tax subsidies, industrial parks, improved infrastructure, subsidized worker training, cheap land and intensifying marketing efforts - involve substantial investment of taxpayers' dollars. Just as private businesses consider expected rates of return on capital-investment projects before committing funds, we need to consider what social rate of return to expect from proposed public investments using tax dollars: What improvements in job creation, earnings and economic growth can we reasonably expect, and at what cost to the community?

In a 1993 study, Robert Crandall of the Brookings Institution says many experts are skeptical about the influence of government incentives on manufacturers' location decisions, and suspect their costs to communities outweigh their benefits.

According to research on plant closings and relocations during the '70s and '80s, most were subsidiaries of firms headquartered elsewhere. Further, firms'Their location decisions often were idiosyncratic, and had little to do with incentive packages.

According to case studies of local attempts to use incentives to lower business costs and retain manufacturing jobs in the Midwest, the jobs eventually were lost.

A 1991 review for the W.E. Upjohn Institute for Employment Research revealed that while differences in tax rates between states and cities had relatively little impact, relative tax rates did significantly influence location choices within states and metropolitan areas.

Crandall's more recent study concludes that government spending on infrastructure, targeted educational programs, etc., had no consistent influence on location choice, nor did tax incentives. Indeed, despite all of the marketing activity and incentives initiated to bring good jobs into our region, data for Southwest Virginia compiled by the Radford University Center for Economic Education indicate economic growth has remained relatively stagnant for the past two decades.

In Crandall's analysis, unionization and wage rates were the only significant influence on such decisions, with wage rates increasing in importance during the 1977-89 period. Differences in the extent of unionization and relative wage rates were twice as important to high-tech firms' location choices as they were to low-tech firms. But low-tech firms were found to be responsive to public expenditures on infrastructure.

Perhaps most important are Crandall's findings concerning workers' gains in real earnings. In the South and West, where the most dramatic growth in job creation occurred between 1967 and 1989, manufacturing workers' real wages changed little. They rose a mere 4 percent in the South and remain below the national average. In the West, they fell by 8 percent relative to the national average. Thus, growth in manufacturing employment alone does not always guarantee income growth.

High-wage jobs are necessary for income and economic growth. But the research implies that to attract manufacturers, especially high-tech ones, our wages, and most likely our overall labor standards, must be lower than those in other localities and regions in the United States and abroad. At the same time, low-tech employers require costly investment in infrastructure but the jobs they create don't necessarily pay high wages.

It also is impossible to be certain how long firms who do locate here will stay. Research has demonstrated that branch plants and subsidiaries are much more likely to close than independent, or locally or regionally owned, firms.

Finally, if the labor standards associated with what have historically been considered ``good'' jobs fall, the result may be downward pressure on labor standards in all occupations for the region. The response to such a decline would be an increase in the demand for publicly provided social services.

by CNB