Laura Contreras Portela

Place-based industrial policies are widely used to attract investment and stimulate employment in targeted locations. Yet subsidized firms can expand without increasing local employment. I examine where the labor supporting this expansion comes from, using Colombia’s Free Economic Zones (FEZs) and a novel georeferenced panel linking municipalities, firms, and workers to the staggered rollout of zones between 2005 and 2018. I find that FEZs increase municipal informality by roughly five percentage points while leaving total employment unchanged. Firms entering the zones are skill-intensive and draw skilled workers from incumbent employers, which raise wages in response. Small, less-productive firms contract or exit, while less-educated workers become 6 percentage points more likely to be informal. These patterns reveal a reallocation of workers across firms rather than an expansion of local employment. The findings show that a large informal sector does not imply an elastic supply of the skills expanding firms demand: when those skills are locally scarce, industrial policy can expand targeted firms while increasing informality and generating no net employment gains.