What about cost of living?

Every time I write or talk about how states or regions rank the question I get most often is “what about the cost of living?”.  Aren’t most of the high prosperity states and big metros in the country – where the knowledge economy is increasingly centered – places with very high cost of living? It is true we don’t correct income for cost of living differentials. Here is why.

First the metric we looked at in our recent top ten rankings––which has gotten a lot of attention––is private sector employment earnings per capita. I don’t know of any private sector employer who pays more for an employee because of their cost of living. Does your employer pay more for an employee in the same job based on whether they own an expensive home or car or not? We don’t. Private sector employers pay for productivity. Someone can do the job as well for less they get hired, increasingly anyplace on the planet. The only reason for private sector employers to pay more in the top ten states is that they are getting something for their money they can’t get elsewhere.

Second, cost of living is only one half of the equation. The other half is what you get for your money. If costs were all the mattered we would all drive a Hyundai and none of us a Lexus. We start with a belief that consumers are rational, not dupes. They don’t over pay for housing or other basics when they choose a place to live and work. When they pay more they calculate what they are getting for their money.

So the fact that housing costs in Michigan are far less than in Chicago and Manhattan doesn’t stop many of our recent college graduates from going to those vibrant cities. Why? Because they are buying the neighborhood, not just the housing. Central Park is worth something as is the access to world class arts, culture and night life. It is no different than middle class families with children paying more for the same house in a community with better schools.

Family A may prefer to live in low cost Mississippi and family B may prefer to live in high cost Massachusetts. But when both decide where to live they think not just about cost but about what they are getting for their money.

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