Ideas in Development

Given the fact that Tier 1 and 2 counties will never get a large share of business attraction projects, is there another way that state policy can build on what is already located in these communities their small business base?

A New Direction

North Carolina could explore other labor-intensive subsidy models, especially since job creation is a prime imperative in these counties. Indeed, one of the paradoxes of the field of business incentives is that most development subsidies are capital-based, yet they are supposed to create jobs. Such subsidies can create jobs, but they are less efficient than labor-targeted ones. Capital subsidies only generate employment as a byproduct of increased production; that is, employment increases are coincidental. However, this does not mean that capital subsidies are inherently good: It just means labor-targeted subsidies offer more direct and potentially cost-effective ways of creating jobs.

More than a dozen such labor-based programs have been run nationally, statewide, or as particular demonstration projects (and there are scores of illustrations in Europe). There is a rich evaluation literature.

A successful example of such an employment subsidy on the state level was the Minnesota Emergency Employment Development (MEED) program. Passed in 1983 in response to the state's worst depression since the 1930s, MEED began as a two-year $70 million program to create temporary jobs in government and nonprofit agencies and permanent jobs in the private sector. MEED offered employers up to $4 an hour in wage subsidies and $1 an hour in benefits for 26 weeks to hire people who had been state residents for at least one month, were unemployed, and were ineligible for unemployment insurance and workers compensation. Over its existence, MEED enrolled about 42,000 people, with more than 64 percent filling private sector jobs. An internal evaluation documented that by the end of the program, the initial cost was partially offset by reductions in general assistance payments and increases in state tax revenues. It created over 18,000 permanent jobs (more than was projected) at a net cost per permanent job of around $3,100. According to an evaluation by economist Timothy Bartik, œIn surveys of participating employers, more than 90 percent reported that the program had a minimum of red tape and its rules were easy to understand. More than 80 percent of participating employers were satisfied with the performance of their MEED workers.

What Could Work in North Carolina

We suggest that the state consider creating a discretionary grant program, modeled on MEED. This Employment Generating Venture Capital Program would be a refinement of the MEED strategy. On a pilot basis, the targeted discretionary grant program would be made available to only Tier 1 (and maybe Tier 2) counties. (If successful, it could be expanded statewide.)

The state would offer private employers up to $6.75 per hour in wage subsidies and $1.75 per hour in benefits (these figures represent 2003 inflation-adjusted amounts of the original MEED figures) for a 26 week period to employ certified job applicants suffering severe economic distress. Local or regional Workforce Investment Boards would award subsidies, on a discretionary basis, to identified employers that hire selected individuals from disadvantaged groups. To be eligible, a worker must have been a state resident for at least one month, be unemployed, and currently ineligible for unemployment insurance (or exhausted his or her six month UI payments), or be a currently UI-eligible individual who has been displaced by a mass layoff (as certified by the WARN law) or a member of a household with no other source of income than UI benefits. To reduce displacement of current workers, the subsidies would be available only for newly created jobs.

Preference would be given to firms that can provide good on-the-job training in both œsoft and œhard skills and that are committed to œrolling over these subsidized hires into permanent jobs with some prospect for advancement. Indeed, as an incentive for long-term placements, if an employee continues in the job for at least one year after the initial six-month subsidy, employers will pay no reimbursement to the state. However, for employees that are hired for fewer than 18 months, employers will be required to repay up to 70 percent of the subsidy. (The actual amount will be pro-rated.)

Since these are grants, not tax credits, these subsidies are ideal for new, young, and/or small firms. (They can be used immediately, not just when the firms have profits or when they file their taxes.) Moreover, there is little uncertainty about such a program: potentially participating businesses already exist in North Carolina. They do not have to be coaxed to come. They must only have expansion plans that require a little financial boost. The upfront grant nature of the subsidy also means that it could improve an enterprise's financial position for obtaining bank loans.

In research CFED conducted late last year, we presented calculations that this program would create many more jobs in Tier 1 counties than the William S. Lee Act. Moreover, this is an approach that will

¢ Provide a stronger stimulus for new hires, rather than substituting capital for labor;
¢ Be much more fiscally cost-effective;
¢ Offer more to smaller firms;
¢ Generate public returns in a year or less;
¢ Foster development in all counties of the state;
¢ Enable all communities and all types of businesses to play and win; and
¢ Aid directly those workers and communities suffering the most economic distress.

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³ The Employment Generating Venture Capital Program (called earlier by CFED-- the Targeted Job Creation Grant) could be made administratively simpler by being available for hiring any unemployed North Carolinian, but we were trying to address those people in greatest need.