Spatial Policies and Heterogeneous Employment Responses

This paper proposes that spatial policies improve economic outcomes by reducing barriers to supplying labour, with heterogeneous effects across demographic groups. Using quasi-experimental variation in Germany’s fiscal transfer system, we estimate higher employment elasticities for female workers, with the strongest impact in places where public childcare supply is smaller. We propose a quantitative spatial model incorporating location decisions and group-specific frictions to labour force participation. We establish that optimal spatial policy would not unambiguously direct resources to low-wage areas but additionally target regions with high labour supply elasticities, yielding substantial welfare and labour force gains in the aggregate. This paper argues that accounting for differential employment responses significantly alters optimal place-based policy design, highlighting a novel channel for addressing efficiency and equity concerns in ageing economies.