Seminar (Dept. of Finance)

Title: Municipal Finance and Labor Mobility

Speaker: Xiaodan Gao, Associate Professor, Renmin University of China

Time: 10:00-11:30, June 13, 2025 (Friday)

Venue: Room 1008, Mingde Business Building

Language: English/Chinese

ABSTRACT:

We examine how labor mobility shapes municipal financing decisions, focusing on the trade-off between debt and taxation while accounting for migration responses. Analyzing Annual Comprehensive Financial Reports (ACFRs) from the 1,200 largest U.S. cities between 2008 and 2021, we find that net labor in-migration prompts municipalities to raise tax rates while reducing debt reliance. To understand this behavior, we develop a theoretical model of municipal finance that explores the optimal mix of debt and tax policies. Our model highlights the critical role of the tax elasticity of labor mobility. Municipalities favor debt when mobility is highly sensitive to tax changes, but can rely more on taxation when mobility is less elastic, as the risk of eroding the tax base is minimal. Our model calibration suggests that labor mobility is relatively inelastic to tax changes, helping to explain the observed negative impact of net labor in-migration on municipal leverage. This effect operates through two key mechanisms. First, an influx of labor increases demand for public infrastructure and services, driving up financing needs for both debt and taxes. Second, it expands the tax base, increasing tax revenues and reducing the reliance on debt financing. Our model shows that the second mechanism dominates when tax elasticity is inelastic, leading to a net reduction in debt reliance. These results show how municipalities manage financial pressures amid changing local economic conditions.