TheEconomistJanuary15th 2022
Graphic detail Determining pay77Wages and places
C
ountlessprotagonistsofgreatliter
ature and film make the fateful deci
sion to move to New York City in search of
prosperity. This very persistent associa
tion seems sensible. Average wages in the
Big Apple are double those in the typical
American city. Yet the real ragstoriches
opportunities may be in humbler places.
Inferring opportunity from high wages
alone can be mistaken logic. Perhaps there
might be something potent about the place
itself. But, on the other hand, New Yorkers
may earn more simply because they have
higher skills. In the latter case, anyone
moving to the city with the ambition to be
Jay Gatsby but without his talents would
find themselves sorely disappointed.Teasing apartthese explanations has
confounded economists for decades. A re
cent paper by David Card (a newly minted
Nobel laureate) and Jesse Rothstein of the
University of California, Berkeley, and
Moises Yi of the Census Bureau—all econo
mists—suggests an answer. Using propri
etary census data, they tracked the wages
of 12m people for nearly a decade as they
moved between jobs in cities across Amer
ica. This allowed them to separate out the
effect of skills on average wages from the
effect of the location premium—the je ne
sais quoiabout a place that makes it more
lucrative for almost anyone.
Mr Card and his colleagues found that
human capital—the calibre of skills of a
given city’s employees—accounts for more
than twothirds of the variation in earn
ings across cities. New York, San Jose and
San Francisco have the highest wages in
America primarily because they have the
highestskilled workers. Location premi
ums are real but smaller. They also have lit
tle to do with a place’s industrial mix. The
billions of dollars localities spend on taxincentivestoattractspecificfirmsmight
thus be wrongheaded. Directly attracting
highskilled people (through amenities,
for instance) may be a better tactic.
The Census Bureau’s disclosure rules
prevent the publication of the precise val
ues of the premiums. But at our request, Mr
Card and his colleagues received approval
to disclose them at a more granular level
than previously published.
To translate these data into meaningful
monetary values, The Economistcalculated
how much more a worker in one of the
lowestremunerated areas of America
(making an average annual salary of rough
ly $25,000) could make by moving. Loca
tion premiums are high in big cities like
New York, San Jose and San Francisco. But
housing costs are also so high that they
cancel out the probable boost to wages. On
the other hand, rural, extractiveindustry
economies like those in North Dakota offer
substantial location premiums (as much
as 26%), without the astronomicrentsof
the big cities. We await the next Great
American novel from North Dakota.nWhy North Dakota, not New York, may
be the land of opportunity→ People matter more than place in determining a city’s average earningsAveragewage,%abovebaseline*
Americancommutingzones,2010-18How moving between cities with different location premiums affects wages
Difference from average wage, %*$25,000peryearin 2015 dollars.Worker-skillandlocation-premiumsapproximatedusingnonileestimates †Above$4,500peryear, as
a proportionofbaselinewages Source:“Location,location,location”,byDavidCard,JesseRothsteinandMoisesYi,2021,working paper025507510012515017520022525012 6 0 6 12 12 6 0 6 12 12 6 0 6 12-15-10-5051015Months before/after moveWorkerswhomovetohigherpremium
citiestendtobebetterpaid.This
sortingcreatestheworker-skill effectLowpremiumto
lowpremiumHigh to lowLow to highVery high
to lowLow to
very highLos
AngelesBismarckandMinotinNorthDakotaare
amongthefewplaces(highlighted)whose
locationpremiumsoutpacehousingcostsLocation
Location-specificbooststo
incomearereal,butsmallerWorkerskill
Muchofthewagepremiumis due
todierencesinskill.Peoplewho
movedonotreapthisbenefitRentalcostsabovebaseline†
Greaterhousingcostsoften
outweightheeectoflocationDaytonaBeach,FLOrlandoMiamiEl Paso, TXScranton, PALasVegasLake Charles, LANew YorkBostonHonoluluFresno, CASan JoseSan FranciscoSeattle
Odessa, TX