Economic development policy and local services: the case of child care.

• Author: Warner, Mildred E.
• Position: Report

Abstract

Increased attention is being given to the role of local services, such as child care, in economic development. While not considered a driver for growth, we argue such services are a critical component of a balanced economic development strategy. We discuss various perspectives on conceptualizing the role of local service sectors: as exports, as import substitution, as human capital investments and as social infrastructure for the broader economy. We construct input-output models for each of the 50 U.S. states and find linkage effects for these local sectors are similar or higher than other sectors that are more typical targets for economic development policy. We recommend economic development policy include support for local service sectors such as child care.

Local Services and Traded Sectors: A Balanced Growth Approach

In this paper we explore the tension between the current export/productivity focus of economic development policy and the need for investment in local services and social infrastructure. We explore different ways to conceptualize the regional economic contribution of local services and argue economic developers should pursue a balanced approach which gives attention to both export industries and local services in economic development policy. Specific attention is given to the case of child care, a local service sector that currently receives scant economic development attention.

There is a tension in economic development policy today between the traditional focus on export base promotion, recognition of the need to target investments to enhance productivity, concern over the relative importance of worker vs firm strategies, and the role of social supports. Traditionally economic development policy in the United States has focused primarily on export promotion as a means to bring new income into the regional economy. Tax abatements to attract outside investment continue to be the primary economic development strategy employed by state and local governments (Warner 2004) despite their limited effectiveness (Bartik 2003, Lynch 1996). While some success has been made in shifting economic development attention toward productivity investments through technology, management, labor, capital and physical infrastructure (Bartik 2003, Lynch 2004a), there is a lively debate over whether these strategies should be focused on export oriented industries (Porter 2003), on occupations (Markusen 2004), or on locally serving sectors which enhance quality of life (Florida 2002).

Michael Porter has pointed to the role of business clusters and a focus on traded services as a strategy to promote economic revitalization in our nation's cities (2003, 2000, 1995). He argues a sustainable economic development strategy would invest in engines for growth. The increased tax base and employment generated from investment in traded sectors could be used to cover the costs of social supports.

Recent work by Markusen et al (2004) finds that the local industry sectors are the largest component of most city economies and the most rapidly growing. Thus if job growth is a primary goal of economic development policy, then investment in locally serving sectors is justified because it provides important support to local economies and critical work experience and income development opportunities for workers. Even Porter (2003) credits local (untraded) jobs as accounting for 67% of total employment and higher rates of job growth than the traded sectors in his analysis of the entire United States. As the job commitment between workers and employers weakens, economic development policy should focus on occupations (and occupational clusters) rather than industries, as workers are a source of productivity and entrepreneurial growth in the regional economy (Markusen 2004, Feser 2003, Christopherson 1990) and they are less locationally mobile than capital.

Florida shares this focus on the worker in his 2002 book, The Rise of the Creative Class, where he argues there is a creative class of workers who promote innovation and entrepreneurship. Florida's work gives new force to quality of life arguments in economic development by arguing cities should be tolerant of diversity and invest in museums, theaters, parks, restaurants and coffee shops to attract talented people (Florida and Gates 2001). These are the spaces where the creative class hangs out, shares ideas and comes up with the innovative ideas for tomorrow. However, Florida's definition of quality of life does not emphasize public education or social services that serve the broad spectrum of society. Florida's focus is on a certain class of worker--well educated, often single, mobile, who is looking for a high quality of entertainment and cultural life. His model does not address the social supports needed by the service workers who staff the coffee shops and museums that the creative class likes to frequent. However, his recent book, The Flight of the Creative Class, acknowledges the need to build a creative society and address the social inequalities that are becoming more pronounced in a world of dramatically uneven economic development (Florida 2005).

The community economic development movement stands in contrast to the Porter and Florida proscriptions, by investing in local services and social infrastructure as preconditions for growth. By building access to capital, providing job training, child care and support for micro-entrepreneurship, community developers have attempted to build a foundation for broader economic development (Clavel et al 1997, Groozner 1998). Porter (1995, 1996) has challenged the community economic development approach for focusing on poor people's needs in stead of business needs and the potential for economic productivity.

However, belief that investments in social supports would naturally follow other economic development efforts fails to recognize the importance of planning and community organizing to achieve such investments. It also underestimates the foundational role such supports play in enabling low income workers to participate in the economy (Harrison and Glasmeier 1997).

In this paper we suggest the productivity focus of Porter on traded sectors, and Florida on the creative class could be extended to include a more balanced approach which considers the role of local services and social supports as part of the infrastructure for productivity in economic development. By balancing concern for productivity with the need for job growth and the importance of social infrastructure (often provided by local untraded services) we believe a more balanced economic development approach can be achieved.

Trade and the Role of Services

How do we treat services? They can be treated as similar to exports, as an import substitution strategy, justified for their human capital development impact, or for their importance as the social infrastructure for broader economic development. Treating services as exports is narrow, but powerful because many state and local economic developers base their economic development policies primarily on an export logic. Service sectors, such as transportation, hospitals, and education are being reinterpreted for their ability to draw outside money to the local and regional economy, and therefore have gained increasing attention as important economic development targets (Pendall et al 2004, Blackwell et al 2002).

However, we argue services like child care should be valued as economic sectors in their own right. They play an important social support function as well as promoting human development in the long term. Because the child care sector is primarily market based in the United States, it would benefit from economic development attention to address the challenges it faces as an underdeveloped market sector. We will address each of these perspectives on services and then present input-output models to demonstrate the child care sector's importance in terms of its large size and strong linkages with other sectors.

Services as Exports

Many contemporary regional economic models are built on an export base theory of growth. Exports are the driver that brings new wealth into the regional economy. This is the point Porter makes when arguing an inner city development strategy needs a source of new revenue (other than government) to be sustainable. With 80 percent of all employment in service sectors, economists have worked to justify incorporating services into standard regional economic models. Typically they divide services into two groups: producer services and consumer services. Producer services are then treated similar to manufacturing, the argument being that their output can be sold to businesses outside the region and thus form part of the export economic engine (Drennan 2002, Hansen 1994, Stabler and Howe 1988).

Consumer services still pose a problem, however, because demand is primarily local and there is little export element to these sectors. The major notable exception is tourism, a sector composed of services such as hotels and restaurants which attract consumers from outside and thus generate "export income" (Wagner 1997, Jeffrey and Hubbard 1988). This argument has been extended more recently to justify economic development investments in higher education and hospitals (e.g. Blackwell et al 2002. Pendall et al 2004).

An important problem with such formulations is that they justify public investments in these services not for the role they play in local human development and social infrastructure in the regional economy--the primary purpose of health and education--but rather for their export income generating potential in serving consumers from outside. The political logic that naturally flows from such arguments is to undermine the notion of a public good. Another problem is that they avoid addressing the fundamental issue of the role of local consumer demand in the local economy. Similarly...