Investing In Lagging Regions Is Efficient: A Local Multipliers Analysis Of U.S. Cities

This paper shows that attracting tradable jobs to a city has a bigger positive impact on employment in the non-tradable sector in the same city when the unemployment rate is higher. Therefore it is efficient to stimulate firms in the tradable sector to locate and/or expand in cities with relatively high unemployment rate. This policy would also reduce disparity between cities. Finally the jobs created in the non-tradable sector due to this local multiplier effect from the tradable sector will employ relatively more current inhabitants in cities with a high unemployment rate, thus making this policy more attractive for local policy makers as well. A simple model illustrates the effect of a demand shock on employment in the non-tradable sector of a city. Empirically I consider the effect of demand from workers in the tradable sector on employment in the non-tradable sector in the same city using U.S. census data from 1980 to 2000. I find that 100 additional jobs in the tradable sector will increase employment in the non-tradable sector in the same city by employing 81 current residents and employing 28 workers that move to the city from other regions. I find that the size of this local employment multiplier depends on the local unemployment rate. Specifically, the multiplier for current residents increases, which drives the overall effect, but the multiplier for migrants decreases.