Spatial Policies and Heterogeneous Employment Responses

Place-based policies influence not only where people work, but also whether they work. Using
quasi-experimental variation from Germany’s 2011 Census we show that redistributive
transfers to local governments increase female labor force participation. To explain these
results, we develop a spatial general equilibrium model in which workers decide on their location and whether to work in the market or the home sector, and this decision is impacted by local public goods provision. Optimizing spatial policies for the German economy generates
welfare gains of 2.7 % and real GDP gains of 2.1 %, substantially larger than gains predicted
by full-employment models.