How can cities best respond to the economic shocks resulting from globalisation and other technological changes?
This question is at the heart of Janesville, the FT & Mckinsey business book of 2017, by Amy Goldstein, which describes what happened to this small industrial city in Wisconsin and its community after General Motors (GM) announced the closure of its assembly plant in 2008 (in an attempt to cut losses during the financial crisis).
Through telling the stories of the people affected by the closure, the book addresses some important policy issues that affect any community in the new industrial age, especially those that are trying to deal with the decline of certain economic sectors. In particular, three important lessons stand out for UK cities from Janesville:
1. Tax incentives can help temporarily stop the haemorrhage of jobs, but not the decline of an industry
In more modern economies, tax incentives and other financial gifts will always play a much bigger role in the location decisions of less knowledge intensive businesses. This is because this type of business cares more about access to cheap spaces and workers, something that many places can provide (in contrast to high knowledge activities such as Amazon’s HQ, say). For this reason, offering tax breaks to such companies can make a place stand out from the rest. And while such investment is always a good thing for the people that benefit from the jobs it keeps or creates, this type of solution is often temporary and vulnerable to the size of the package that other places offer.
The experience of Janesville told in the book exemplifies this. A year after the closure announcement, GM disclosed that Janesville was one of the three finalists to produce a next-generation subcompact car. In order to land this, Wisconsin put together an incentive package worth $195 million, the largest in the state’s history. That’s a lot of tax dollars. However, this was a less than a fifth of the package that the state of Michigan offeredto successfully persuade GM to give the production of the new car to Orion Township.
And while winning the bid is good for Orion, what happens when the contract for another car come up for grabs? It will not be that surprising if GM decides once again to move to the next highest bidder.
2. Economic recovery is not deterministic or linear, and policy affects the trajectory
By 2015, seven years on from the closure, the unemployment rate in Janesville was down to 4 per cent, the lowest since the beginning of the century. But none of the new jobs paid the average 28 dollars an hour that most jobs at the plant provided, suggesting that jobs in the automotive industry have been replaced by low-pay ones.
This could well describe the path that cities in England and Wales followed when facing decline in more traditional industries. Some cities like Mansfield and Leicester have offset the historical decline in less knowledge intensive industries with other types of jobs. But just like in Janesville, these tended to be low-skilled ones.
In contrast, Manchester managed to reinvent its economy by replacing low-skilled jobs with high-knowledge ones. But this process took decades: it was only in 2016 that Manchester had more jobs than in 1911, with the most recent jobs growth driven by KIBS and potentially creating a long-lasting legacy. This turnaround would have not happened on its own as policy played a role in this. For example, Manchester decided to redevelop its city centre, making it more attractive to businesses, and its city centre economy has grown strongly since.
3. We still know very little about how best to help displaced workers retrain for new jobs
Everyone would agree that for workers who lost their jobs in a declining industry, the best path to secure lasting employment is retraining for a different job. In particular, this is often highlighted as a solution to outsourcing and automation. And in the US, hundreds of millions of dollars have been poured into these types of programmes.
To test whether this is true, Goldstein followed the workers laid-off in 2008 that went to the Blackhawk Technical College, a state school that focuses on vocational training. With the help of two economists, Kevin Hollenbeck and Laura Dresser, she analysed the data on their subsequent employment prospects. The findings were surprising: in 2011, those laid-off workers who went to college were less likely to be in work than those who didn’t and they also earned less on average.
This is not to say that job training does not work but the benefits might take time to materialize. When the What Works Centre (WWC) looked at past initiatives to support displaced workers, such as post displacement retraining, it found that the profile of the participants affect the outcome, with younger workers benefiting the most. This might have to do with the fact that they stay longer in the labour market. And when the WWC looked at the evidence on employment training more generally, it found that the design and format of the course matter more than macroeconomic factors. For example, short programmes are more effective for less formal training activity and on-the-job training outperforms classroom-based ones. But the evidence was inconclusive on many other aspects.
More generally, Goldstein’s findings highlight the need for more evidence on this important issue. The Government has recently announced that it would fund employment schemes across the country. When these are designed, resources should be allocated to monitor their impact, to better understand what is effective and the WWC developed a toolkit to help places do this. In addition, having access to administrative data could help local officers make better informed decisions. For example, data from the HMRC could help track the earnings paths of the individuals that participated in this type of programmes.
This blog first appeared on the Centre for Cities website.