Renewing Economically Distressed American Communities

MICHAEL GREENSTONE

ADAM LOONEY

Renewing Economically Distressed American Communities

Deep recessions can put some places in a tailspin for decades. Some modest policies can help speed the recovery.

All communities do not fare equally well after recessions and other economic shocks. Some bounce back fairly quickly. Others suffer more and take longer to recover—sometimes decades longer. A sluggish return to growth is not always necessary, however. There is evidence that well-targeted policies may be able to speed the pace of recovery.

Buffalo, New York, is one example of a community that has suffered for far too long after an economic shock. In 1950, Buffalo was the nation’s 15th largest city, boasting nearly 600,000 residents. It was a nexus of manufacturing and automobile and aircraft assembly and home to the world’s largest steel mill. Buffalo’s boomtown prosperity radiated out across Great Lakes shipping lanes and railway hubs, and attracted migrants from around the country. In 1970, the president of Bethlehem Steel, the operator of the steel plant, said of the city, “You can’t help but believe that a tremendous decade lies ahead.”

But three harsh recessions between 1969 and 1982 pushed Buffalo and many other manufacturing-based cities off the path to prosperity. During each recession, manufacturing employment in the United States plummeted by between 9 and 15%. These were not temporary layoffs; jobs disappeared, shifts shrank, and plants closed. Buffalo’s steel mill, which had employed 20,000 workers in 1965, was shuttered completely in 1982. That year, unemployment in the Buffalo area, which had been well below the national average for at least a decade, topped 12%. Local income, which was more than 6% above the national average in 1970, is today 9% below the average. When jobs disappeared, so did workers—in droves. By 2000, Buffalo’s population had fallen by half. Property values dropped, and neighborhoods crumbled into disrepair, pocked with abandoned homes. More than a quarter of the city’s residents lived in poverty.

Today, Buffalo remains distressed, and poverty in the central city is still very high, but the situation is improving. The Buffalo metropolitan area’s unemployment rate of 7.6% is below the national average. Employment rates have increased, and income, although still below average, is no longer falling even further. New businesses have moved in. Developers, drawn to low property prices, have started to enter the local real estate market. Families have followed. In 2010, Forbes Magazine called Buffalo one of “America’s Best Places to Raise a Family,” based on factors such as the cost of living, prevalence of homeownership, median household income, commuting time, crime, and high-school graduation rates.

No city should have to suffer the persistent distress that Buffalo and other cities have endured. It should not take 40 years for a city to recover. But the slow pace of recovery in the wake of the recent Great Recession, compounded by ongoing restructuring in the U.S. economy, raises the troubling prospect of newly distressed communities that will languish for a long time.

Here we draw on economic research to argue that a national economic strategy to aid distressed communities is both appropriate and necessary. There are many opportunities to develop and implement policies that can deliver more success stories and quicker recoveries, even in the wake of a rapidly changing economy. We recognize, however, that every community is different and that there is no one-size-fits-all solution for the challenges facing economically distressed communities. We therefore propose a basket of options that could begin the process of restoring good jobs to local workers. Each option follows three approaches: attracting new businesses, aiding displaced workers, and matching workers to jobs.

The problem of distressed communities

Workers and their families living in especially hard-hit communities face a number of challenges. Unemployment in persistently distressed areas often arises from plant closings or mass layoffs associated with declines in specific industries and businesses. Unlike other types of joblessness, these losses can result in a permanent reduction of job opportunities as well as the erosion of local workers’ marketable skills. In addition, evidence suggests that local economic shocks have long-lasting effects on local labor markets.

Losing a long-held job does not just result in temporary unemployment. It often leads to permanent income loss because workers earn lower wages upon reemployment. Figure 1 summarizes a study completed by Till von Wachter, Jae Song, and Joyce Manchester that compares the earnings trajectories of workers who lost their jobs in a sudden mass layoff in the early-1980s recessions and workers who maintained their jobs throughout those recessions. Before the recessions, both groups’ earnings followed a similar pattern. After the recessions, however, displaced workers faced devastating long-run earnings losses. Even in 2000, almost 20 years after the 1980s recessions, a sizable earnings gap remained. According to the study, a displaced worker with six years of job tenure faced a net loss of approximately $164,000—more than 20% of his or her average lifetime earnings. Long-run earnings losses in fact dwarf income losses resulting from a period of unemployment.

Job loss also has calamitous effects on workers’ health and families. In the year after they lose their jobs, men with high levels of seniority experience mortality rates that are 50 to 100% higher than expected. Elevated mortality rates are still evident 20 years after job losses. Children of jobless workers also suffer income loss. They not only have a tough time finding jobs when the unemployment rate is high in their local labor market, but also earn considerably less than their peers elsewhere once they have entered the market. Earnings gaps persist even 10 years after these young people have left school.

A sharp economic shock permanently affects communities just as it affects workers. For communities experiencing the largest economic contractions during recessions, the impact on employment and income can be extremely persistent. The data show that unemployment rate differences between distressed areas and the rest of the country dissipate within a decade, but this is largely because of workers leaving distressed areas rather than a resurgence of job opportunities.

Figure 2 shows income for the 20% of counties that experienced the largest drops in inflation-adjusted income per capita during the early-1980s recessions. About 10% of U.S. residents live in these counties. Before the recessions, average incomes in these counties (indicated by the purple line) moved in lockstep with incomes in the rest of the country (indicated by the green line). During the recessions, however, incomes in these counties plunged by 14% more than did average per capita incomes elsewhere.

For most of the country, it took less than two years after the end of the 1982 recession for average incomes to return to their pre-recession levels. But for the hardest-hit communities, it took more than six years. Figure 2 shows that, after the recessions, incomes in these counties began to grow again but at a slower rate than in the rest of the country. Instead of catching up, these communities lagged farther behind. Today, almost 30 years later, there is a gap of almost $10,000 in average per-person income.

A different but still disconcerting pattern holds true for employment. Figure 3 illustrates the path of employment (defined as the share of local residents with a job) relative to where communities started in 1979, just before the recessions. Employment in the hardest-hit areas plunged: Roughly 4% of their respective populations lost jobs. Although employment growth eventually returned and roughly followed the trend in the wider economy, the gap has still not closed. There are simply fewer working adults in the most distressed areas even today.