Ball State Univer-sity recently released a study on personal income in Indiana. I was one of the authors of this study, which detailed the wide variation in the standard of living across counties in Indiana. The study was a solid piece of work, thanks to the insight of many colleagues, but in the ensuing news coverage and discussion, there are at least two points that need reinforcing.
First, wages are the result of market forces. The amount of money one earns is not a measure of the importance of your job, or how much you are loved. Rather it is the result of how much your employer values your contribution to work, and how many other people like you are in the labor market. We economists call this the “demand and supply of labor.” The balancing of these two effects ultimately determines how much you get paid. So, if workers in a region earn more or less than workers in other regions, it is due to these fundamentals. That is where policy, either in households, schools or government must address the problem.
Second, the cost of living differences between regions is also the result of market forces. Many folks who commented on our study believe many places in Indiana are at a special advantage because it is cheaper to live here, especially with respect to buying a house. This is perniciously flawed thinking, which is easily debunked.
Suppose two otherwise identical homes are placed in two different locations. The sale price for each must be due to differences in the surrounding areas. We know from extensive research the importance of local schools, crime, tax rates and local amenities on home prices. School quality alone may explain a third of home price differences across the state. This school effect is easy to estimate, but the “quality” of neighborhood amenities is not. One way of measuring the livability of a community is to estimate differences in home prices that cannot be explained by other measures. Simply, the market for houses captures all that is good and bad in a house, and reveals a price. So, “housing affordability” may simply be a synonym for neighborhoods that are valued less by those looking to buy a house.