Enterprise Zones Fail to Spur Economic Action

A study published in December by UC Irvine economics professor David Neumark and co-author Jed Kolko of the Public Policy Institute of California suggested that enterprise zone programs are ineffective at creating new jobs in economically troubled areas.
Enterprise zone programs, a form of government economic aid originally borrowed from Great Britain and popularized in the 1970s and 1980s, aim to help develop economically distressed communities by encouraging job production. This is accomplished by providing a number of incentives for businesses to comply with the program’s goals, including tax breaks for every employee hired from a low-income area and preference in obtaining state contracts.
Under current legislation, 42 enterprise zone districts may exist simultaneously in California. Each district, once named, maintains its enterprise zone status for 15 years. When these terms expire, other localities apply with the Department of Housing and Community Development to fill vacant spots. Communities are chosen where the state believes the program will be most effective.
The study, which draws its conclusions from data collected between 1992 and 2004, makes several improvements in methodology over previous research on enterprise zones. According to co-author Kolko, enterprise zones are not defined by existing geographic boundaries, such as zip codes and census tracks, and because economic data is often collected by studies in this way, the data in these studies may be less accurate.
In their study, Neumark and Kolko used a database of business establishments to digitally map businesses by location, then used software to determine whether they were within an enterprise zone, allowing the potential for a more accurate comparison of businesses inside and outside enterprise zones.
“We’re not really doing anything in this study that is new in terms of the basic approach of how you examine these policies. Really, the idea was to do a much better job on the measurements,” Neumark said. “Even though other studies have used things like census tracks, that’s not actually the way to designate these zones, so those can turn out to correspond pretty badly to where the actual boundaries lie.”
With respect to net job increases in the California program, the study finds that the program is ineffective and fails to increase job growth. However, it concedes that, while the program seems to produce no net increases in jobs, it may alter the composition of those employed in favor of “disadvantaged” workers.
Although the reasons involved in the observed failure of the program to create jobs were outside the scope of the study, Kolko speculated that landlords may realize businesses are willing to pay more for real estate in areas designated enterprise zones and consequently raise the price of rent.
This increase in the cost of rent would mostly negate the program’s incentives and undermine its ability to hold influence over business. According to Kolko, it may simply be that the incentives are not large enough to encourage businesses.
The value of the program, which cost the state about $330 million in 2006, is already debated. The Legislative Analyst Office, a legislative oversight group, recently suggested that the enterprise zone program be cut back to save money in light of the statewide budget crisis. Meanwhile, the California Association for Local Economic Development recommended the expansion of the program as a kind of economic stimulus.
“The state spends more money on enterprise zones than any other economic development effort,” Kolko said. “There’s still a lot of disagreement as to what the effectiveness and value of the Enterprise Zone Program is, which is why we think there is room for new, good research.”