Opinion and Economic Analysis

Hicks: Attractive places help Indiana grow faster

June 8, 2013

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

Families make choices about where to live based upon a variety of factors, including playgrounds, safe and attractive neighborhoods, and recreational activities. Workers in these households will sacrifice to obtain these things, commute long distances and even forgo higher wages.

Businesses like to locate where they can be more profitable, not just where costs are lower. The nicer places favored by households 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, thus 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.

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

The fastest-growing businesses in the nation, those that hire the most and pay the best, care little about land costs. It is people that matter. 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.

The thirst for amenities is whetted by wealth. To no surprise, higher-income households are willing and able to spend more to live in nicer places. These 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.

Remember that these are the same households willing to 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.

The implications of this are pretty clear: Nicer places are going to see an increasing share of household and business location. Places with below-average schools, crummy neighborhoods and limited recreational opportunities will watch as people and businesses leave.

This is Indiana’s greatest economic challenge.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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