500 Million Euros Wasted Each Year in Urban Free Zones: Promised Jobs Ended Up Two Streets Away

Five hundred million euros. That is roughly what the state shelled out each year at the height of urban free zones, a scheme designed to reduce unemployment in the most distressed neighborhoods. And yet, when you look a little closer at where those touted jobs actually went, the answer can sometimes be found right across the street: in the neighboring shopping district, or in a space left vacant for a few months before an already existing company moved back in. This paradox, documented for more than twenty years by public financial oversight bodies, deserves a closer look.

Half a billion euros per year to relocate jobs rather than create them

The story begins in 1996-1997, in a context where mass unemployment hit certain urban areas labeled as sensitive. The idea seemed obviously sensible: offer substantial tax and social exemptions to companies that would settle in these territories, in exchange for a commitment to recruit locally. The first urban free zones thus emerged, with the stated aim of turning struggling neighborhoods into hubs of economic activity.

On paper, the figures are almost dizzying. In the zones created from 1997 onward, it was estimated that after five years the exemptions would have enabled the establishment of 9,700 to 12,200 enterprises, generating between 41,500 and 56,900 jobs. This would, at first glance, justify the program’s cost, which reached up to 527 million euros in 2009. But these totals mask a far more nuanced reality, repeatedly emphasized by successive reports from the Court of Auditors.

The Court of Auditors debunks the mechanism: how firms simply crossed the street

That is where the problem lies. According to evaluations of the scheme, the majority of companies that settled in these zones were not created ex nihilo: they were already located nearby, sometimes literally just a few streets away, and moved merely to capture the tax advantage. This phenomenon, economists call the windfall effect or the transfer effect, was identified as early as 2000 by a study from Ernst & Young, which noted that the cost of exemptions was calculated without distinguishing whether the job was genuinely created, merely relocated, or even preexisting.

As early as 2001, the Senate pressed the point, judging that evaluations of the famous “cost of employment created” were built on methodologies too uncertain to yield credible results. In other words, no one could really distinguish a new job from one that existed nearby, just a step away, before migrating to benefit from the tax windfall. The Economic, Social and Environmental Council later confirmed this finding, noting that the mechanism had mainly triggered a migration of companies rather than a true net creation of economic activity.

Free zones that benefit only a few streets, not entire neighborhoods

Another blind spot of the scheme concerns the residents themselves, those for whom these measures were originally intended. INSEE acknowledges that establishments did take root, but it also reminds that these creations did not translate into a proportional rise in employment for local populations. A measure conducted in Île-de-France even put the increase in the probability of return to work for local unemployed residents at only 3%, a meager result in light of the sums invested.

Yet a hiring clause did exist: beneficiary companies were required to employ at least 50% of staff living in the priority zone. But this obligation, meant to guarantee a direct effect on local unemployment, mostly encouraged shrewd relocation strategies rather than a genuine net hiring policy. Moreover, the profiles sought by companies did not always match the qualifications available locally, which further limited the tangible benefits for neighborhood residents.

What this twenty-year failure reveals about urban policy

In response to these repeated findings, the state did not stand still. The initial list of 44 zones was expanded in 2004, and again in 2006, bringing their number to around one hundred. But the budgetary cost steadily declined: from 527 million euros in 2009, it fell to 419 million in 2011, a drop of 29% in three years. The scheme was also tightened, with a cap on the tax relief reduced to 50,000 euros per twelve-month period, and a name change signaling a shift in focus: urban free zones became urban free zones-territories entrepreneurs, or ZFU-TE.

This gradual recalibration says a lot about the difficulty public authorities have faced in steering the program without abandoning the tool altogether. Temporarily revitalizing a neighborhood by drawing in economic activity is possible, and it has sometimes worked locally. But transforming the labor market across a territory in a lasting way, with little more than a fiscal carrot, proved far more complex than expected. The result is a program that cost public finances dearly while delivering effects well short of initial ambitions, a scenario not unlike other well-intentioned but ultimately less successful urban development policies.

One lingering question continues to animate budget debates: how to design an exemption scheme that truly incentivizes job creation, without handing a disguised bonus to firms that merely had to cross the street to benefit? Twenty years after the first urban free zones were created, urban policy still seems to be seeking the right balance between tax incentives and real economic transformation of neighborhoods.