The thirst for amenities is whetted by wealth. Unsurprisingly, higher-income households are willing and able to spend more to live in nicer places. These higher-income households are not so by accident, but rather because of more education and skills. Workers from these households are more prized by businesses, which is why they are paid better. Now remember that these are the same households willing to accept a higher “compensating differential” to live in a nicer place. This means that they will take lower wages and pay higher home prices to live, work and shop in a higher quality community. That boosts business profits and can more than offset land prices and higher taxes. This creates a virtuous cycle where nice places grow and not-so-nice places shrink.
Michael J. Hicks, Ph.D., is director of the Center for Business and Economic Research and associate professor of economics at Ball State University. Contact him at firstname.lastname@example.org.