Arnold Kling  

Cost-of-Living Arbitrage

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Ed Glaeser writes,


If economic productivity - created by low regulations or anything else - was causing the growth of Texas, Arizona and Georgia, then these places should have high per capita productivity and wages. Yet per capita state product in Arizona in 2009 was $35,300, 16 percent less than the national average. Per capita state products was $36,700 in Georgia and $42,500 in Texas.

He argues that population growth in the sunbelt is driven by cost of living factors. In particular, fewer housing regulations serve to lower the cost of housing.

I think that the phenomenon of cost-of-living arbitrage may become increasingly important. People who are in high-wage occupations can choose where they live on the basis of amenities. People who are in low-wage occupations, including what may be an increasing number of people with only sporadic employment, will choose where to live based on cost.

My guess is that as many Baby Boomers retire without adequate savings, a lot of them will be looking for low-cost places to live, including Latin America.


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CATEGORIES: Income Distribution



COMMENTS (11 to date)
physecon writes:

He's also missing the connection to minimum compensation. Many of the high tax states have higher minimum/living wages and/or minimum benefits. This amounts to effectively outlawing the employment of the less productive residents.

coyote writes:

I wanted to echo physecon -- the different in productivity by state could well be due to differences in mix, ie the mix of industry types, rather than differences in absolute productivity levels incomparable businesses. Businesses with large amounts of labor per unit of output may still be fleeing states with restrictive labor regimes for places like AZ and TX and be consistent with this data.

John Thacker writes:

I'm not sure that any focus on average income of residents can ignore immigration and internal migration.

One way of putting it, similar to what you're saying and agreeing with his data, is that the rich states have adopted policies that make it impossible or uneconomic for those with only average or low skills to live there (unless they are part of a strong union, especially a government union, able to extract higher wages.) So some of those states achieve high average wages and productivity by essentially driving away the middle class.

This is similar to how countries with larger welfare states and permanent unemployment achieve higher average productivity among people with jobs, because those with low productivity don't work.

IVV writes:

I would have guessed that part of the low cost of living comes from being in the Sun Belt and having sun. Let's face it, people in New York City would pay for better weather if it were actually possible to do so.

Better weather means a lower cost of living naturally, but the cost can't be measured by money, because money doesn't help.

Jordan writes:

Glaeser is failing to think at the margin. Average productivity is irrelevant to individual decision making. What matters is the productivity of the marginal worker.

This is the kind of lazy thinking that some economists lapse into when speaking to non-economists.

fundamentalist writes:

From the BEA paper Glaeser referenced:

However, real GDP by state does not
capture geographic differences in the prices of goods and services that are produced and
sold locally.
BEA is working toward a long-term goal of replacing the national implicit price
deflators used to deflate state-level current-dollar GDP by industry with state-specific
prices.

So the per cap gdp for each state is deflated using a national index without adjustment for cost of living. The BEA is working on adjusting the figures for cost of living, which will make comparisons between states more realistic. My guess is that per cap gdp adjusted for cost of living will show that the south enjoys about the same standard of living as the high cost states.

Also, there's this:

During 2006 and 2007, Texas created 52 percent of all new jobs in the nation, according to a study done by the Southern Methodist University's Cox School of Business.
from http://spectator.org/archives/2010/12/28/the-red-and-blue-states-fort-s

People move to find good jobs, not good housing.

Ryan writes:

I hear the weather is nice in California.

Arnie writes:

I doubt that many will leave the country to find cheaper living expenses. Language is a barrier for many. Still and all, Arnold is essentially correct.

ChanceH writes:

If per capita state income were the cause of people moving to Texas, then yes per capita state income would be higher in Texas. Hard to argue with that. I guess when people moved to Texas, they did something besides get out the per capita income chart. Astounding.

Maybe the people doing the moving are all "atomistic" and stuff, and only care that they, as an individual, will be able to make more money.

(the points about cost of living arbirtrage are all fine too ..... the initial quote just seemed so stupid that it didn't even really deserve quoting to me).

michael writes:

A portion of the cost of living arbitrage won't show up in wage data.

I've known several people here in California who worked for 25 years, paid off a house, and moved somewhere inexpensive. This allowed each to purchase a larger house, in cash, and have a few hundred thousand left over, plus their savings.

Those who made the move didn't need a large income to get along, and a few just retired early.

Long story short: if the difference is large enough, people won't care about the reduction in wages.

Scott Gustafson writes:

Arizona has about 6.6 million people. Pull out the approximately 400,000 illegal aliens and the retired snow birds and see what you get for per capita state product.

There's a lot more going on here than just a difference in productivity.

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