The Best Thing States Can Do to Create More Jobs

create more jobs Lowering taxes on doing business might be the first thing that comes to mind when you think about ways for states to encourage job growth, but that isn't the case at all, according to a team of economists from Penn State. Their research shows that high-tech training may actually be the key to creating more jobs and improving a state's economy.

"We found that lower state taxes were not statistically associated with a state's economic performance," said Stephan Goetz, professor of agricultural and regional economics at Penn State. "The tax climate was not linked to either growth or income distribution."

That sort of flies in the face of conventional wisdom, but is welcome news for legislators trying to balance tight state budgets. Goetz found states that favor low taxes do not necessarily spend funds efficiently. They may skimp on funding needed for public services like road maintenance and education. Those costs are often transferred to businesses directly or become obstacles for businesses seeking to attract qualified workers to the state.

"It's essentially a case of you get what you pay for," Goetz said. "You can't attract businesses if you can't provide needed public services." Even if the cost of doing business is low in a certain area, if you can't get your goods to market, or you can't attract top employees because the standard of living is low, what good would it do you to locate there?

While lower taxes were not factors in economic growth, the researchers said policies that promoted the use of high technology and entrepreneurship were significantly correlated with job creation and economic growth. States with more technology classes in school, higher domain name registrations and more people online tended to economically outperform states with a lower emphasis on technology.

So how would one explain California's high unemployment rate? Isn't there a technology hiring frenzy going on there? In this case, the one state can be looked at as two, Northern Vs. Southern. In Northern California, where it's all about technology, unemployment is low and hiring is high. In Southern California, where there is less emphasis on high tech, unemployment numbers are much higher.

Goetz said lowering taxes is often categorized as a race-to-the-bottom policy and investing money in technology is considered a race-to-the-top strategy. "Race-to-the-top policies are generally defined as those involving investments in education, entrepreneurship and infrastructure," said Goetz. "In contrast, race-to-the-bottom policies involve competition among the states for jobs by using lower taxes and industrial recruitment incentives."

Goetz said that the importance of finding the right mix of race-to-the-top and race-to-the-bottom policies to stir economic recovery is growing for state officials. "Economic growth is an important issue that preoccupies economists," said Goetz. "It's especially important with the lackluster economy and the threat of a possible double-dip recession."

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