Regional subsidies and interregional labor movement
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Regional subsidies and interregional labor movement Daisuke Matsuzaki1 · Yoshiyasu Ono2 Received: 27 March 2019 / Accepted: 26 September 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract Japan distributes lump-sum grants and subsidies to the vast majority of local regions. Each region makes a decision regarding expenditure and can choose between nondistortionary direct transfers to the region’s natives and subsidies to stimulate the local economy. Considering a two-region economy with interregional labor migration, we compare the welfare effects of direct transfers and economic stimulation subsidies including those intended to support production, employment, wages, and residents. The results show that under full employment, replacing direct transfers with stimulation subsidies benefits (harms) natives if the recipient region specializes in labor-intensive (labor-saving) activities. However, such replacements can be detrimental to natives if the region suffers unemployment due to wage rigidity. For example, wage and resident subsidies may cause harm as they promote immigration, without stimulating production. JEL Classification H71 · R23 · R51
1 Introduction A majority of Japan’s local regions, including prefectures, cities, towns, and villages, receive lump-sum grants and subsidies from the central government. These grants can be allocated as direct lump-sum transfers to the region’s natives or as subsidies that stimulate local economic activities and immigration. A typical example Electronic supplementary material The online version of this article (https://doi.org/10.1007/s0016 8-020-01029-8) contains supplementary material, which is available to authorized users. * Daisuke Matsuzaki [email protected] Yoshiyasu Ono [email protected]‑u.ac.jp 1
Faculty of Economics, Toyo University, 5‑20‑28 Hakusan, Bunkyo, Tokyo 112‑8606, Japan
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Institute of Social and Economic Research, Osaka University, 6‑1, Mihogaoka, Ibaraki, Osaka 567‑0047, Japan
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of such grants and subsidies is tax allocation grants (chiho kofu zei). In 2019, the Japanese government distributed approximately 16.2 trillion yen of tax allocation grants across numerous local regions. Each region is given discretion to determine how the funds are spent.1 The choice between lump-sum transfers to the regions’ natives and stimulation subsidies has a critical impact upon local welfare. Therefore, in this study, we examine if native households in a recipient region are better off when lump-sum transfers are replaced by stimulation subsidies. We adopt a two-region, two-factor, two-commodity model, in which a subsidyrecipient region produces only one commodity, while in a donor region, two commodities are produced. Each region may experience full employment or some unemployment, with workers able to migrate between regions in pursuit of higher utility. The welfare of native households in each region is contingent on the factor intensity of the local industry and the employment conditi
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