How the CHIPS and Science Act Will Target Economic Development in Distressed Labor Markets

As part of this past summer's CHIPS and Science Act, Congress not only funneled $50 billion of federal funding into U.S. semiconductor production, but also allocated $1 billion for a new place-based policy – the Recompete Pilot Program (RPP). The RPP, unrelated to semiconductor production, seeks to boost competitiveness and growth in several of the nation's persistently economically distressed areas. The program intends to target long-term comprehensive economic development and job creation in selected areas by supporting workforce development, business development, and infrastructure activities.

This article explores the RPP's funding structure, proposal requirements, and potentially eligible distressed labor markets within the Fifth District. A brief discussion of the legacy of U.S. place-based policies provides context for how the RPP addresses previous policy successes and failures. Incorporating evidence from research on previous place-based policies, the RPP addresses local economic distress with flexible funding that will cater to the priorities of the selected areas.

Informed by the Legacy of Place-Based Policies

The RPP is the latest in a legacy of U.S. place-based policies going back nearly 100 years. The first major federal place-based policy in the U.S. was Congress' establishment of the Tennessee Valley Authority in 1933. The infrastructure investments (e.g., hydroelectric dams, canals, roads) that the policy provided for the distressed region (encompassing parts of Tennessee, Kentucky, Alabama, and Mississippi) sped its industrialization and led to lasting benefits such as high-paying manufacturing jobs, according to research by Patrick Kline and Enrico Moretti. Another prominent federal place-based policy was the Empowerment Zone (EZ) program created under the Empowerment Zones and Enterprise Communities Act of 1993. The EZ program targeted tax incentives and block grants to distressed areas of the United States to encourage economic, physical, and social investment. Most recently, the Tax Cut and Jobs Act established Opportunity Zones (OZ), which allowed the deferral or avoidance of federal taxes on capital gains for those that invested in designated disadvantaged census tracts.

Studies analyzing the effects of place-based policies have been mixed. Research by Timothy Bartik and others indicates that place-based policies designed to lure large businesses with major tax breaks or to encourage hiring at existing small- and medium-sized businesses with tax credits are often ineffective and/or highly inefficient methods of generating jobs in distressed areas. Results around EZs and OZs have been mixed. Research by Matias Busso, Jesse Gregory, and Patrick Kline suggests that the EZ program "created jobs in zone neighborhoods, that both zone and nonzone residents obtained employment in these neighborhoods that would not have otherwise been available, and that earnings increased substantially for local workers." However, research by Matthew Freedman, Shantanu Khanna, and David Neumark suggests that the OZ program had little effect on the employment, earnings, or poverty of zone residents.

Based on a proposed policy by Bartik, the RPP seeks to address the inadequacies and successes of previous place-based policies. The RPP attempts to encourage empirically proven cost-effective strategies for long-term growth (e.g., investments in infrastructure, job training, business parks, and university-business partnerships). These strategies are often forgone in favor of tax-based incentives for employers since they do not attract as much attention, along with the fact that distressed regions often do not have strong tax bases to support such programs. Therefore, the federal government has a role to play in encouraging these economic development policies with block grants.

The Recompete Pilot Program (RPP)

The RPP authorizes a total of $1 billion to fund grants to at least 10 economically distressed local labor markets (e.g., metropolitan statistical area, micropolitan statistical area, commuting zone, tribal area) and/or communities (e.g., city or municipality served by a general-purpose unit of local government). Grant amounts may not be lower than $20 million and will be determined by the proposed activities and cost structure of an approved recompete plan, along with the area's level of economic distress and population size.   

Key to the success of a recompete plan proposal is how an eligible entity makes the case that their strategy will promote sustained local economic growth manifested by increases in local jobs, per capita wages, and the rate of prime-age employment. Based on the bill passed by Congress, proposals must include a comprehensive economic development plan that describes the activities and programs that will be implemented, including how the plan addresses the specific economic challenges of the area. Proposals must also address the administrative entities that will be responsible for implementing the programs along with associated costs, expenditures, and disbursement schedules.

There are three types of development activities eligible for RPP funding:

• Workforce Development: These programs seek to educate and train individuals with skills that are in demand by local businesses. Examples include customized job training programs by local community colleges, outreach programs targeted to lower-income neighborhoods, and job placement services in neighborhood institutions (e.g., churches, public housing, nonprofits).
• Business and Entrepreneur Development: These programs aim to stimulate local job creation through aid to small- and medium-sized businesses. Examples include manufacturing extension services, small-business development centers, and centers to help businesses bid for federal contracts.
• Infrastructure Development: These activities may support business and job creation through the development of research and technology parks, business corridors, or other structures and facilities.

Identifying Distressed Labor Markets

What constitutes a distressed labor market? The legislation defines distressed areas as those that have significantly below average employment-to-population ratios. Bartik has developed a framework that could be used to identify eligible, distressed areas for the RPP. Bartik identifies a local labor market as moderately distressed if its employment rate for "prime-age workers" (ages 25-54) falls below 77.6 percent and as severely distressed if it falls below 73.6 percent. Areas with prime-age employment rates above 77.6 are "Less- or Non-Distressed."

The map below identifies the areas in the Fifth District by their level of economic distress. According to Bartik's methodology, there are several clusters of distressed areas within the district. Only two counties in Maryland (Allegany and Washington in the state's Western region) are severely distressed. By contrast, most areas in West Virginia are severely distressed. Virginia's severely distressed areas are concentrated in the Southern and Southwestern regions of the state. The severely distressed areas of North Carolina are primarily in the state's Northeast and Sandhills regions. South Carolina's severely distressed areas are in its Pee Dee region and the counties surrounding Aiken and Sumter.

Closing Thoughts

Upon the allocation of appropriations, the Department of Commerce's Economic Development Administration will administer the RPP grant competition which will disburse grants six months after it begins accepting proposals. The RPP's relatively flexible approach to targeting development needs across distressed areas should allow communities to propose solutions that they believe offer the highest probability of success. Of course, outcomes of the 10 selected areas will need to be thoroughly evaluated to inform future communities and policymakers about whether the RPP can serve as a blueprint for future place-based policy initiatives.

This article was updated to more accurately reflect the Recompete Pilot Program's timeline of grant competition and disbursements.