Tom Snyder: When jobs outnumber people, how should we spur economic development?

North Carolina's economic development strategy may need a significant shift to address the growing trend of entrepreneurship and the need for policies that better support young businesses.

Last week I reported on a recent study conducted by the NC Secretary of State’s office, in partnership with Dr. Caroline Glackin, an economic development researcher at UNC Pembroke. The study analyzed the job creation engine that young businesses represent in North Carolina. I also discussed comments made by Tom Barkin, the President and CEO of the Federal Reserve Bank of Richmond, which is responsible for economic support to the region of the US which includes North Carolina. I’ll summarize a couple key points below, but you may want to read that piece as a preface to this week’s article where I’ll take a deep dive into the economics of economic development, and suggest that North Carolina make policy steering adjustments, based on recent data.

As of May 2023, there were approximately 888,000 registered and active businesses in North Carolina. More than half of them, 460,000 formed between July 1, 2015 and June 30, 2022. If you assume new businesses formed at the same rate from July 2022 - May 2023 (which is conservative, new business formations have been on the rise the last 3 years), then approximately 526,000 new businesses have been launched in NC in the last 9.5 years. That represents 59% of all businesses in the state.

What does this mean for economic development?

For many decades, economic development at a city, county and state level has consisted of “hunting for jobs." By this, I mean that economic development offices primarily focus on attracting companies to move to, or open a new office or facility in, the jurisdiction of the economic development office. The idea was founded on the premise that there are more people in an area than there are jobs for those people. Therefore, if a major effort could be conducted that brought a chunk of new jobs all at once, that would be beneficial to balancing the scales between residents and jobs.

At a tactical level, attracting jobs usually consists of spending millions of dollars on site development projects and tax incentives, plus often a token spend (by comparison) on workforce development. Workforce development is one of the carrots that regions offer, under the assumption that companies won’t relocate to a place where the workforce is not skilled for whatever that company does. I won’t spend time on this topic today except to say that I have not seen strong evidence that workforce development is particularly meaningful on a company-by-company basis. My view is that most programs are woefully underfunded, and the target companies themselves are detached from the process, failing to provide a significant number of meaningful internships and apprenticeship opportunities for practical skill development. If I hear enough feedback, I can dig deeper into this topic another day.

Where I want to focus today is on the two largest tools in the toolbox for traditional economic development, namely site development and tax incentives.

Site development prepares available land for factories, distribution centers, data centers and other large facilities by putting in place utilities, communications and transportation infrastructure. These costs quickly scale into the millions of dollars. Depending on the site location, geography, zoning and population density, typical costs of site development may look like:

● Land acquisition - $3,000 - $30,000 per acre

● Grading - $10,000 - $100,000 per acre

● Roads, Utilities, Stormwater Management - $50,000 - $500,000 per acre

● Environmental Remediation - $100,000 - $1-5M or more

● Permitting - $5,000 - $50,000

Tax incentives are most commonly negotiated as an exemption from future taxes, based on the number of jobs an employer will create. In North Carolina, the Job Development Investment Grant (JDIG) is administered by the Department of Commerce. This is a performance-based tax incentive program. This means that incentives are given to the companies based upon actual job creation and capital investment that occurs, typically over 5-12 years. There tend to be minimum thresholds on number of jobs, wage level and amount of capital invested.

The JDIG program has been under significant scrutiny in recent years. Earlier this year, during my annual State of the Region Address, I reported on how frequently large, established companies fail to hold up their end of the bargain in these negotiated deals. The examples in the non-exhaustive list below represent $432.1M in tax breaks that failed to deliver in the recent past (source: Carolina Journal reporting on the NC Dept of Commerce Economic Incentive Committee):

● Bandwidth - failed to meet $113M payroll goal (Raleigh)

● Allstate - missed hiring goal by 850 jobs (Charlotte)

● Centene - pulled out of $1B expansion and 6,000 job commitment (Charlotte)

● Advance Auto - failed to create 700 new jobs promised to create $1B benefit to NC (Raleigh)

● Microsoft - pulled out of two multi-million dollar expansion promises (Charlotte, Morrisville)

● Sonic Automotive - failed to create “hundreds of jobs” (exact number not reported)

● Conduent - did not achieve 200 job expansion (Durham)

● S&D Coffee - promised 200 jobs but actually reduced headcount by 150 (Concord)

I do not know the total sum that the state spends annually in economic development site work and tax incentive programs, but it is easily north of $100M.

This form of economic development has not always underperformed. Originally, focused on manufacturing, it was well suited to meet the needs of the heyday of growth in the 1940’s through 1960’s. Manufacturing was the core industry for many cities across the country. By the 1970’s we saw slowing of growth and by the 1980’s massive job losses in that industry began to occur, largely due to globalization. Many communities failed to adjust their economic development strategy in this period and fell victim to what we now know as the rust belt.

In many communities, the core principle was not abandoned, but rather adapted to other industries. Site development and incentives for advanced manufacturing did not create as many total jobs, but were still major economic projects. Knowledge workers needed large corporate campuses and labs and facilities to work from. Even today, data centers - which create very few jobs - are incentivized with these same tools. A small to medium data center creates roughly 50 direct jobs. Primarily these are security guards, maintenance staff and a handful of IT support and electricians.

I’ll share an example. Google built a data center in Lenoir, NC. The project started in 2007 and expanded in 2018. It has been reported that the project was eligible for $26.5M in property tax incentives from Caldwell County and NC. It additionally qualified for JDIG incentives estimated at $10-20M and likely received site development support in the range of another $10-25M. The site has created roughly 150 direct jobs, and many indirect and temporary jobs like construction on the project.

For purposes of estimating the return on the economic development incentives, let’s assume that this project was awarded the midpoint of each of the ranges above. In this case, the data center project cost taxpayers $59M ($26.5M property taxes that were not collected + $15M in employee taxes not collected, plus $17.5M in taxpayer money spent to develop the site). Considering the 150 direct jobs created, that is a cost of $393,333 in taxpayer spending per new job created.

To qualify for JDIG incentives, the jobs created must pay a wage that is at least 110% of the average wage in the county the jobs are created. Currently, the average wage in Lenoir (Dept of Commerce, 2023 data) is $40,000-$42,000 per year. Therefore the data center jobs created must be at least $44,000-$46,200. Likely most of the data center jobs are near that average, with a few of the IT positions paying higher. Let’s assume that across the 150 jobs, the typical wage is $50,000 per year.

I won’t get too far into the weeds here, but a worker in North Carolina making $50,000 per year and taking a standard deduction pays approximately $1,770 in state taxes annually (not including common deductions like mortgage interest or child tax credits). At this pace, it would take each worker 222 years to pay back the original investment that the state made to attract their job to NC.

Of course this is an oversimplification. The data center project created a halo of other jobs in the region, and workers pay sales taxes and conduct beneficial commerce with other businesses as their salaries circulate money through a local economy. But even with these secondary benefits, it is extremely difficult to reconcile the benefits of “big game hunting” style economic development.

Why does this kind of economic development still dominate in most places across the US? I think there are two reasons.

First, and probably most significantly, big projects create big headlines. Elected officials love ribbon cuttings, grand openings and the shock-and-awe news cycle that accompanies these types of projects. These are newsworthy wins that are easy to campaign on. It is no wonder that the same big companies that receive huge incentive packages are often one and the same as the companies spending millions of dollars on lobbying and campaign contributions. These projects provide mutual benefit to both parties, while your average taxpayer ultimately covers the cost.

As a side note to this first point, journalists fall prey to this big story trap. Of course it is newsworthy to cover big corporate development wins. It should be every bit as meaningful to cover a startup that hired employee #3. After all, that’s 50% corporate growth, a huge win! But editors don’t prioritize small businesses that most people have never heard of as big news, and the fact a story like this is happening every single day somewhere in your community makes it impossible to deploy enough reporters to cover the activity.

The other reason this style of economic development continues to persist is more subtle.

The answer hearkens back to the original premise. Are there more workers than jobs?

In most larger cities, there is so much opportunity that they are seeing massive immigration. Raleigh is a prime example. At a recent event hosted by the city, they announced that Raleigh is seeing 70 new people move here every single day. Does that sound like a place where there are more workers than jobs? Quite the opposite. Employers are desperate for talent. Now, more than ever, people are taking control of their own destiny through entrepreneurship.

There have been two keys that have steered people to consider entrepreneurship - and to start new businesses - at record rates. Technology advancement and the wake-up call of the pandemic. I do not believe this is a temporary glitch or bubble. The shift towards entrepreneurship is a cultural shift that is accelerating.

4G and 5G networks, precise global positioning technology, secure mobile payments and cloud services have combined to enable new forms of work to be highly effective. Gig Economy style jobs have become prevalent in many verticals including transportation, retail, healthcare, logistics and distribution. These jobs allow people to set their own schedules and work only as much as they want to.

At the same time, these technologies have reached a maturity that enables a massive segment of jobs to be worked remotely. Remote work has eased the pressure of commuting and for some has reduced the pressures of childcare and other factors that may have kept people out of the workforce. Beyond working remotely for a traditional employer, remote work capability has also created a spike in freelancing, as people put their skills in the market for themselves.

The pandemic was a tipping point, providing a wake-up call that energized many people to experiment with this new paradigm. In 2021, we saw the Great Resignation where millions of people (more than 4M per month in late 2021 and early 2022) quit their jobs out of frustration, burnout and realization that there is a better way to live than to be at the whims of a sub-optimal employer. As people reevaluated their career paths, more and more frequently they decided to work for themselves or take a chance on starting their own business.

Fundamentally, we have flipped to a society that has far more jobs than people. No longer are people defining themselves through the lens of 40 hours per week. Entrepreneurs often work more than 40 hours, but on things they are passionate about. And many work less, setting their own limits, based on numerous quality of life considerations.

In places like Raleigh, it is easy to recognize the new paradigm where there are more people than jobs. In more rural areas, it can be more difficult to see this. For a place to authentically have more jobs requires broadband. Rural communities that have invested in fiber and that have strong cellular networks, like Wilson, NC, are thriving. But places that lack high speed networks are stuck in the past. There is a digital rust belt, if you will, of communities that are unable to connect their residents to the thousands of job opportunities available in the remote work and gig economy.

Places without broadband may still have more people than jobs. But here’s the thing. Those places won’t attract companies to open a new office or factory. Because those employers require broadband as well. Even the old economic development paradigm is bound to fail.

What should economic development offices consider in a world with more jobs than people?

The priority shifts to labor. Where economic incentives previously were steered towards industry, communities now must focus on their residents. Immigration is vital for growth. Tulsa, Oklahoma was an early mover in this space. In 2018, Tulsa launched a program called Tulsa Remote, offering $10,000 to anyone who moved to the city to work from Tulsa, no matter where their actual job was housed. Local residents pay income and sales taxes, and Tulsa was happy to import worker salaries from companies elsewhere.

There is still a need for business focused economic development, but increasingly it should focus on young companies, not established ones. Remember, it is young businesses that create the new jobs. The State of Virginia has put taxpayer dollars into a startup investment fund and is co-investing with traditional VC’s. Early stage capital, provided through grants or seed investments can make or break the success of a new venture.

Recall from last week - if North Carolina were able to help just 5% more early stage ventures to make it past year 4, to become sustainable businesses, it would create 25,500 new jobs, driving nearly $1B in new wages and another positive $500M+ in halo effect commerce.

What would it take to drive that 5% improvement? Let’s get back to the numbers.

There are 526,000 businesses in North Carolina created in the last 9.5 years. Let’s assume a third of them, or 175,000 are 3 or younger. Five percent of that total would be 8,750 businesses, each employing 2.66 employees (not including the owner). As I discussed last week, If those businesses reached sustainability, they would create an additional 7.6 jobs each - a massive windfall for the state.

What might a state incentive program look like for these small businesses? Let’s look at the data center project from above. $59M in incentives to create 150 new jobs. $59M could instead look like a $6,700 grant to each of the 8,750 young companies. Would that amount of additional working capital make a difference to a small organization? It is a no-brainer to think that it would create enough impact to result in far more jobs than 150 created at the Lenoir data center run by a $1.6 trillion dollar company.

I’m not sure that a free handout to every new business makes sense. But I absolutely think that a significant budget allocation to be deployed to new businesses should be core to future economic development strategy for North Carolina. I would make this a combination of competitive grants, revolving loan programs and some form of grant/investment matching program.

I believe we should focus both on attracting labor and supporting entrepreneurial ventures. The playbook should include funding for:

● Increase the current SBIR/STTR matching program administered by the NC Department of Commerce (the One Small Business Fund).

● Add funding for startup micro grants and larger grants, administered based on a competitive application process and by an independent nonprofit organization or private foundation like NC IDEA.

● Create new funding for childcare and elder care as an attraction tool for talent and to free entrepreneurs to spend more of their time and money on achieving sustainability for their businesses.

● Invest significantly into affordable housing. The most successful regions are the ones that have strong workforces and the lack of affordable housing is a huge impediment to a healthy and diverse economy.

● Create an equity investment fund, administered by an independent nonprofit to invest in local companies, providing a path to direct financial return on taxpayer dollars back to the state.

● Invest heavily in nonprofit Entrepreneurial Support Organizations that provide support and resources to entrepreneurs and startups. [Full disclosure - I operate RIoT, a NC-based nonprofit ESO].

● Create new loan programs and bolster existing ones to help small businesses invest in capital equipment and early stage direct costs.

● Eliminate the restriction on local government to establish broadband infrastructure and provide broadband services to their own residents.

● Require economic development support services to be funded by private industry as a component of bids to deploy new private broadband services, to help impacted communities to take advantage of the broadband to create new jobs once the infrastructure is in place. Note that there is significant federal funding for these broadband projects that broadband providers are applying to claim. In my opinion, those projects should not be awarded without aligning entrepreneurship programs, funded independently by private industry as a requirement for award.

Note that not everything on the list above is new. Affordable housing, for example, has been a major topic of discussion in recent local elections. But I suggest a slightly different framing. Call these “economic development” priorities. Housing should not only be a concern of the housing authority. Economic developers should be thinking about all of the above topics as part of their new playbook – are more impactful than simple site development and JDIG style tax incentives.