Tourism in Industrialized Countries: Catalyst for Growth or Economic Burden?

This paper studies the long-run effects of foreign tourism on local labor markets and economic development in advanced economies, using Italy as a case study. To isolate plausibly exogenous variation in tourist arrivals, I construct a shift-share measure that interacts changes in outbound tourism by country of origin with historical destination preferences across Italian locations. Higher exposure to tourism reduces employment and labor-force participation rates. It also induces structural transformation by expanding employment rates in hospitality and entertainment while contracting them in manufacturing and in non-tourism-related services. Average per-capita and labor income decline, whereas property income increases. Estimates in log-levels indicate that tourism raises local population, shrinks the manufacturing sector, and expands tourism-related services. Evidence on underlying mechanisms points to two main channels. First, tourism alters the composition of the local labor supply. Population growth is driven by young, low-skilled non-Italians, limiting the ability of productive, non-tourism firms to benefit from agglomeration forces. Second, rising land costs crowd out non-touristic activities. Consistent with this, nearly all net firm entry is accounted for by tourism-related establishments. Overall, results suggest that, in advanced economies, tourism may hinder long-run development by reallocating resources from more to less productive sectors.