Increase in imports adversely affects provision of public services across U.S. localities

Source: IZA Newsroom, October 19, 2016

Recent research suggests that workers living in places with a heavy manufacturing presence in the U.S. have experienced both a decline in wages and a deterioration of employment prospects due to increased imports from China. While social assistance and trade adjustment programs at the federal level did kick in, they did not make up for the adverse labor market outcomes in these areas. As a result, workers in the manufacturing sector, but also in non-manufacturing sectors which do not face direct competition from China, have experienced a decline in incomes.

Local governments may play an important role in this context both by mitigating risk through welfare spending and by investing in public services, such as high quality education and infrastructure, to ensure the competitiveness of workers and firms. The problem is that funding for these public services is highly localized in the U.S., with a heavy reliance on property and sales tax revenues. Therefore, a decline in the level of local economic activity and incomes in an area’s labor market depresses revenues and restricts the ability of local governments to fund services, precisely at a time when these expenditures may be needed the most. ….

Related:
Trade Shocks and the Provision of Local Public Goods
Source: Leo Feler, Mine Zeynep Senses, Discussion Paper No. 10231, September 2016

From the abstract:
We analyze the impact of trade-induced income shocks on the size of local government, and the provision of public services. Areas in the US with declining labor demand and incomes due to increasing import competition from China experience relative declines in housing prices and business activity. Since local governments are disproportionately funded through property and sales taxation, declining property values and a decrease in economic activity translate into less revenue, which constrains the ability of local governments to provide public services. State and federal governments have limited ability to smooth local shocks, and the impact on the provision of public services is compounded when local income shocks are highly correlated with shocks in the rest of the state. The outcome is greater inequality not only in incomes but also in the quality of public services and amenities across US jurisdictions.
Text: See Discussion Paper No. 10231