Corporate Megaprojects and Jobs: Economics PhD Student Measures Impacts of Multi-Million-Dollar Subsidies

When Apple was planning an expansion outside of California in 2012, it came down to two finalists: Texas and Arizona. Both cities prepared elaborate packages of tax breaks and incentives to make their case. In Texas alone, the incentives were reported to be worth more than $35 million.

The stakes for these competitions are high. Whichever state Apple chose would benefit from an anticipated 3,600 new jobs, with potentially more to come if the move attracted other employers to the area. Apple, then and now the world’s most valuable company, could change the local economy.

Alaa Abdelfattah, an economics doctoral candidate in the College of Letters and Science at UC Davis, has been studying how corporate megaprojects affect local labor markets. This summer she expanded her work with a $15,000 grant from the Washington Center for Equitable Growth. Among the findings so far are that tax breaks and other incentives often don’t pay off by creating jobs as they were meant to.

“The reason large firms are getting incentives from state and local governments is for them to create jobs, and this analysis shows that in some of these places they don't create jobs,” said Abdelfattah.

A unique approach to measure job creation

When a large employer enters a new market, like Apple ultimately did in Texas after the 2012 competition, it creates new jobs of its own but also might attract other companies that also hire locally. For example, a new car manufacturing plant could be a reason for a tire supplier to build a facility nearby. These additional jobs, which Abdelfattah calls “clusters,” are a true account of a company’s impact on hiring.

There’s also the chance that the new corporate facility has nothing to do with an uptick in job listings. Any new hiring might also reflect local trends that were already well underway.

“Since firms' location choices are not random, we don't know if the effect of these firms on the market is because of their choice of market, meaning the market itself, or because of their entry,” said Abdelfattah.

Abdelfattah focused her analysis on competitions between cities for corporate megaprojects, narrowing down her list to 25 of these projects between 2013-2019. This list includes the 2012 Apple finalists of Texas and Arizona that ultimately saw Texas as the winner.

The average subsidy package for these megaprojects was $333 million, with projections that they would create, on average, 1,100 jobs. Those subsidies could include deferred taxes, a new university training program or new roads.

Mixed results for local jobs

The research shows that across those 25 megaprojects, there was little difference in the number of job listings across 50,000 websites between the winning county and its runner-up. It also turns out that counties that won megaprojects had lower average wages and lower job qualification requirements.

"These large firms are given a lot of money to create jobs,” said Abdelfattah. “We're asking, first of all, are we seeing this idea of clusters of new employers who are hiring? The answer is no, at least in the job postings.”

In fact, Abdelfattah described a situation in which employers are competing for qualified applicants. This type of competition stands in contrast to the idea of a new employer creating more jobs with higher wages.

“What we're seeing is that there is almost a hollowing out of wages where there's an increase at the upper end and the lower end and a reduction in wages for people in the middle,” said Abdelfattah. “These new firms are having the same effect that new technology had in the early 2000s.”

Giovanni Peri, a professor of economics and Abdelfattah’s doctoral advisor, said that the study also shows how large firms may affect the types of skills needed from workers in the area. He said these results could inform educational policy and institutions in what skills will be in high demand in the coming years.

“While previous studies had looked at impact of large firms on other smaller firms, technology or productivity, this work will add the analysis of effects on required skills of workers," said Peri.

Making sure corporate subsidies create jobs

The story of Apple’s 2012 decision to expand in Texas instead of Arizona didn’t end there. A year after its failed 2012 bid, Arizona got a second chance with an incentive package worth about $10 million for Apple to house one of its contractors to produce synthetic sapphire for high-end phone bezels.

Those plans changed in 2014 when that company, GT Advanced Technologies, filed for bankruptcy. Apple never collected the state’s incentives. In 2016, Apple opened that site as its own 1.3 million-square-foot global data center that would employ about 150 permanent workers.

“Ideally you want subsidy deals to be conditional on creating jobs,” said Abdelfattah. “The reason to offer subsidies is for companies to create jobs. If they don’t create jobs, making those subsidies conditional on actual job creation is a way to hold those companies accountable.”

—Alex Russell, content strategist in the UC Davis College of Letters and Science