Spatial Impacts of Relocation of Government Workers (Job Market Paper)

Abstract: The South Korean government recently relocated its major central ministries and nearly 20,000 government workers to a newly built Sejong City to mitigate the capital region's overcrowding problem and to achieve balanced national development. Not only is this monumental place-based policy interesting in its own right, but it also provides a unique quasi-experimental opportunity to study how such a relocation program affects the spatial allocation of economic activities at local and aggregate levels. Motivated by those facts, this paper studies two questions. First, how does the relocation affect the local labor markets in the targeted city? Second, what are the regional and aggregate impacts of the relocation? For the first question, I find significant local job creation effects by applying the synthetic control method: an additional government worker creates 1.27 private sector jobs. The effect is particularly significant for 0.94 local service jobs but noisy for 0.33 tradable sector jobs. Next, I study the aggregate impacts based on a quantitative spatial model featuring exogenous government workers with multiple spatial linkages. Benchmark counterfactuals show that the relocation increases total output by 0.02% and private sector workers' welfare by 0.06% while reducing the government workers' welfare by 2.5%. Surprisingly, the relocation alone increases total output even without extra floor space supply in Sejong City as it mitigates spatial misallocation. The underlying mechanism highlights the importance of the capital region, the most productive area. Specifically, since the relocation makes available space in the capital region, tradable firms can move in and take advantage of the capital region's high productivity, resulting in higher output. Further counterfactual simulations reveal the nature of the zero-sum game in regional development policy. Making only Sejong City and its neighboring cities more attractive lures workers and firms from all other cities, which implies a potential trade-off between resolving the capital region's overcrowding problem and achieving balanced national development.