Do Local Residents Value Federal Transfers?

Abstract

A fundamental governance challenge for federal nations is benefiting from decentralization, while addressing potential negative side effects, including vertical and horizontal imbalances. Inefficient migration due to differential net fiscal benefits in subnational units is one potential negative side effect. To avoid this type of migration, federal payments to disadvantaged subnational units, a place-based policy, are often advocated. In this article, we assess federal equalization transfer payments in Canada as an example of such a policy. Equalization is appraised in terms of its marginal influence on interprovincial migration, after accounting for the persistent relative attractiveness (unattractiveness) of provinces as migration destinations/origins. We then compare equalization to an alternative policy that directly subsidizes workers. Compared to a ``people-based'' policy of wage subsidies, our findings suggest that at the margin, these federal transfers have virtually no impact on net migration.