Recent years saw the somewhat unedifying sight of cities across the United States falling over themselves to try and entice the 2nd Amazon headquarters to their region.  They would offer huge incentives to the tech giant in the belief that they will bring jobs and prosperity to the area.

New research from West Virginia University suggests that such behavior may actually do more harm than good, especially for workers in the middle classes.

“Incentivizing the wrong industries can fail to lead to growth in employment locally in those industries and our research suggests this may potentially be contributing to the decline of middle-class jobs,” the researchers say. “For this research, we examined what happens to the mix of jobs within communities when you incentivize certain industries.”

Attracting prosperity

The researchers used data on taxes and incentives from a range of sources to hone in on both the incentivized industries, and the impact on jobs their migration had.  For example, do economic development incentives in sectors that contain a lot of middle-class jobs primarily affect jobs in that industry or does it trickle down into lower-skilled work?

When exploring two cities in particular, a clear trend appeared.  In San Antonia, Texas, the employment index had been growing consistently between 2000 and 2015, with the city shifting tax incentives away from companies in the creative sector to those in working-class areas.

“In the early 2000s, San Antonio was incentivizing industries in the creative class more, like your Amazon-types,” the researchers say. “Then they switched, and by 2015, working-class industries faced more incentives. This seems to have paid off.”

By contrast, Birmingham, Alabama, began by incentivizing working class sectors, but shifted to provide tax incentives to more creative class jobs.  Here, overall employment fell during the same timeframe.

It’s an anecdote that the researchers believe accurately reflects the wider picture.  The researchers suggest that middle-wage jobs make up around 60% of employment, and yet high-wage industries typically attract the most favorable tax rates, with this gap growing over the time.

They believe that raising taxes on high-wage industries wouldn’t result in negative employment across any skill-class, and instead would actually increase employment among both the working- and middle-classes.

Building jobs

“Policymakers really need to think about whether these incentives are paying off,” the researchers say. “Not just whether they’re creating jobs–but are they inadvertently contributing to the decline of the middle class, which they say they want to support?”

Amazon are the obvious example, and the researchers cite the $750 million tax incentive offered by Virginia State to encourage the company to build a facility in Arlington, with Delaware also signing off a multi-million dollar subsidy to encourage a warehouse to be built in the state.

“Our research suggests there’s no reason Virginia should have given Amazon all of those tax breaks because they’re going to have the same amount of high-end jobs before and after,” the researchers conclude. “If anything, it could be that Virginia may see a decline in middle class jobs afterwards. And they’ve just given away their tax revenues. It’s like giving away the farm.”