Opinion and Economic Analysis

Hicks: How to cut labor costs? Improve quality of life

December 21, 2013

It is Christmas time again, and as usual I struggle to find gifts for those I care about. My lovely wife told me she might need a cleaning appliance of some sort.

About the only thing I know to give this year that might be honestly appreciated is a brief column on a subject that affects almost every community. Moreover, it is almost entirely free of the ill-informed ideology that seems to drive so much public policy. It is a simple economic model of regional growth.

Let us suppose that households that are better educated and more skilled have more choices about where they choose to work and live. Second, let us suppose that households are willing to make trade-offs between the quality of life in the place they live and their earnings. So, households must be compensated extra to live in less-attractive places.

Finally, let us assume that businesses seek to maximize profits, a process that includes worrying about labor costs. None of this seems too much a stretch of common sense.

An astute reader might see four or more equations in the preceding paragraph. Solving these equations provides clear outcomes.

Attractive regions will attract households with greater location choices. These households will inevitably be better educated and command a higher income. However, all things being equal, workers in these places will not require quite as high a wage to live in these places as they would to live in a less-desirable place.

The first result of solving this model is that nice places tend to attract more people, and these people tend to be of higher income. This alone would commend efforts to improve communities as an important economic development tool. Population growth is, after all, the chief worry for most places in Indiana.

However, there is more to the story.

The real magic of the model is the trade-off between wages and amenities. In our simple model, we see that higher-income households are more likely to move to (or stay in) nicer places. But they are also willing to accept a lower wage to do so. The result is a remarkable outcome.

Places with better amenities do tend to have higher-income households, and of course all the benefits that accrue to them. But for a business looking for workers, the nice place will offer a wage advantage over less-attractive locations.

This means improving quality of place reduces business costs on the most costly of inputs—human capital. So, as we think about attracting business to Indiana, we ought to get better at thinking through these simple models.•

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

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