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June 16, 2013

Our nice towns grow fast

There's a link between economic performance, schools.

I think by now most people understand that differences in population growth, and therefore economic growth, between regions are due to differences in amenities such as schools, parks, the cityscape and natural attractions. While the link between economic performance and local schools is self-evident, I am often asked to explain why having more and better local amenities matters to job creation. It is a simple concept, really.

Households (aka families) make choices about where to live based upon a variety of factors. Among them are the presence of things such as playgrounds, safe and attractive neighborhoods and recreational activities. Abundant research also reveals that workers in these households are willing to sacrifice to obtain these things. They are willing to commute long distances and even forgo higher wages to live in nice places. We economists call these sacrifices “compensating differentials,” and this will be important later in this column.

Businesses like to locate in places where they can be more profitable, not just where costs are lower. The nicer places that households favor also possess higher land costs and typically higher tax rates. This will weigh heavily on profitability for some firms. However, these places pack in more people and thus they boost profitability for businesses that need local consumers. They also reduce hiring costs and let businesses take advantage of the well-known productivity increase in urban areas (we economists call this agglomeration).

The interaction between the location choices of businesses and households would seem to be a complex dance among these factors; however, there are a couple of matters that bring amenities to the forefront.

First, the fastest growing businesses in the nation, those that do the most hiring and pay the best wages, care little about land costs. It is people that matter. The high land costs and property tax costs figure only modestly in their location calculus. This gives a growing edge to places that can attract lots of people, but there is an even bigger factor at play.

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