March 2013

Transportation investments: study shines light on economic impacts

The analysis studied the economic impacts of projects such as this highway
expansion near Brainerd. (Photo courtesy Robin Elstad, MnDOT)

Transportation investment has long been a popular strategy for promoting economic development at the state and local levels. As funding has become tighter in recent years, however, DOTs and other public works organizations have begun to sharpen their focus to determine where and how resources should be deployed to yield the greatest returns. In a study funded by the Minnesota Department of Transportation, U of M researchers examined two highway improvement projects to evaluate the potential of transportation investment for boosting private economic activity.

The researchers, led by Mike Iacono, a research fellow in the Department of Civil Engineering, studied two Minnesota projects: the expansion of U.S. 71/TH 23 (including the Willmar Bypass) near Willmar, from 1999 to 2003, and the expansion of TH 371 (including the Brainerd Bypass) between Little Falls and the Brainerd/Baxter area, completed in various phases between 1998 and 2005.

The analysis focused on county-level earnings by the construction, manufacturing, retail, and wholesale industries. Earnings data from 1991 to 2009 were collected for the county (or counties, as in the case for the TH 371 project) in which the project was located, along with neighboring counties.

The results? “None of the industries studied in either of the case study locations show evidence of statistically significant increases in earnings following completion of the respective improvements, once population and macroeconomic trends are controlled for,” Iacono says.

A second part of the analysis examined whether the projects might have induced changes in growth rates at the sub-county level. (Data from a third project, the expansion of St. Louis County/U.S. Highway 53, was included in this part.) Iacono’s team used city-level data on total employment for municipalities within the county where the project was located. As in the industry analysis, he says, the results indicate “little evidence of statistically significant impacts” on employment in the towns most directly affected by the projects.

Iacono notes that the research cannot rule out that the highway projects had a positive yet statistically indistinguishable effect on employment due to variance in the data. He also notes that despite efforts to control for macroeconomic trends, the results may have been affected by the recession, which coincided with the latter years of the data.

Overall, Iacono concludes, two broad trends could explain the modest economic impact of transportation investment. First, non-transportation factors—such as labor quality, taxation, and quality-of-life contributors—may increasingly overshadow transportation infrastructure as sources of growth.

Second, the findings from this and other recent studies suggest that the returns of transportation investment have generally been declining as many types of networks have matured. The introduction of interstate highways, for example, often provided order-of-magnitude-type improvements in travel times between large cities, but most contemporary projects are generally smaller and seem unlikely to be major catalysts to economic development by themselves, he explains.

Moving forward, Iacono suggests that highway projects should be evaluated more on explicit benefit-cost criteria rather than their effects on local employment.

“This study provides valuable insight,” says Matt Shands, coordinator of the Transportation and Economic Development (TED) Program, a partnership of MnDOT and the Department of Employment and Economic Development. He adds that the analysis did not include projects such as those in the TED program, which leverages private and public funds to support and target improvements to specific economic development needs. “In its first two years, the TED program has provided matching funds for 24 projects statewide and will help to create or retain more than 7,000 jobs,” he says.