THE JOBS IMPACT OF LOCAL ECONOMIC DEVELOPMENT: LESSONS
Local officials may be greatly overestimating the benefits of economic development efforts
to create new jobs in a community. While many studies suggest that each new job may
create an additional three to four jobs locally, new research by Professors Dan Black,
Terra McKinnish and Seth Sanders, published in the Economic Journal, suggest that
these estimates may be too high by a factor of ten.
Using data from the coal-producing regions of Kentucky, Ohio, Pennsylvania, and West
Virginia in the United States, the researchers examine the impact of the coal boom
generated by the dramatic increase in coal prices in the 1970s (which were associated with
the OPEC oil price increases) and subsequent bust in the coal industry associated with the
rapid decline in oil prices in the 1980s.
Because of the large magnitude of the shocks – one large coal-producing county’s per
capita income increased from 53% of the national average before the boom to 90% of the
national average at the peak of the boom – the researchers were able to find precise
estimates of the impact of the growth and contraction of the coal industry on other sectors
of the economy.
They find that one additional job in the coal industry created between 0.17 and 0.35 jobs in
sectors in which goods and services are produced and traded locally.
While it is often argued that new jobs in one sector will increase demand for goods
produced and traded locally, the potential negative impact on other sectors is often ignored.
Local firms that trade their goods nationally or internationally do not experience an increase
in demand for their products, but must now pay higher wages to compete for local workers.
These increased labour costs might cause them to reduce employment and output in the
local area.
The researchers, however, find little evidence to suggest that jobs moved away because of
higher labour costs, so it does not appear that the coal boom crowded out other industry in
these areas.
The magnitude of wage increases generated by the increased demand for local labour, and
the extent to which the existing local population benefits from the new jobs, will depend in
large part on the extent to which migration into the area absorbs the increased demand.
Black, McKinnish and Sanders find that the coal boom reduced out-migration of prime-aged
men and generated return-migration of prime-aged men that had previously left the region.
They also find that the boom increased wages and reduced both the level and rate of
poverty in coal areas, suggesting that the existing residents did benefit from the coal boom.
The coal-producing counties in the four-state region are, with the exception of those in
Pennsylvania, geographically isolated from large metropolitan areas, suggesting that
‘spillovers’ from the coal shocks would be greater in this region than in urban areas.
Consumers in Eastern Kentucky had long drives if they wished to do their shopping in
Lexington or Cincinnati, so an increase in demand for goods and services as a result of the
coal boom should have resulted in increased demand in the local economy.
While the positive spillovers into the local sectors were smaller than some might have
expected, the good news is that the number of jobs that moved away in the traded sector
due to increased labour costs were smaller than might have been expected as well. There
is little evidence that the coal boom crowded out manufacturing employment in the coal
areas.
ENDS
Notes for editors: ‘The Economic Impact of Coal Boom and Bust’ by Dan Black, Terra
McKinnish and Seth Sanders is published in the April 2005 Economic Journal.
Dan Black is at the Center for Policy Research at Syracuse University; Terra McKinnish is
in the Department for Economics at the University of Colorado, Boulder; Seth Sanders is
Director of the Maryland Population Research Center at the University of Maryland.
For further information: contact Dan Black on +1-315-443-9040 (email:
danblack@maxwell.syr.edu); or RES Media Consultant Romesh Vaitilingam on 0117-983-
9770 or 07768-661095 (email: romesh@compuserve.com).