Michael Hicks: What is ‘quality of place?’

For more than a decade, a team of us at Ball State University argued that local economic and population growth was primarily caused by something called ‘quality of place.’ This idea helped motivated the Stellar Communities program, the Regional Cities Initiative and now the READI grants. This ‘quality of place’ argument is a big idea that directly challenges the way Indiana has approached economic development for a half century. Given how challenging the past fifty years have been for Indiana’s economy, every Hoosier should be interested in understanding what ‘quality of place’ means.

Some of us like sandy beaches or mountains, while others of us prefer urban nightlife. This makes choosing actions to improve a community a daunting business. Indeed, many of the things people like are not sensitive to government policies, like sunny weather, lakes or mountains. Others, like 5-star restaurants or museums, follow residents. They cannot be conjured into being by even the most ambitious mayor.

Knowing what exactly to do or build to promote local economic growth is not an easy task. One cannot directly ask prospective residents what they want because it’s nearly impossible to find these people in a survey. So, opinions about what constitutes quality of place aren’t very useful.

Fortunately, there’s a market-based approach that doesn’t require any assumptions about what people prefer. Instead, we simply measure what prices people are willing to pay for a home or accept as a wage when choosing where to live. Markets for workers and homes then become key ways to think about the relative quality of any particular community when compared to all others. My colleagues and I have recently done this work, which yielded some important results.

We first created statistically identical homes by using data on dozens of housing characteristics, such as the number of rooms, the age of the structure and the cost of construction materials. By ‘controlling’ for these characteristics, we can then compare the price of homes across locations. In some places, residents are willing to pay a premium for an otherwise identical house. That is a place where our national housing markets indicate is a great place to live. In other communities, prospective residents will only be willing to pay a discounted price for a home. In those communities, housing markets signal problems.

The beauty of this approach is that it compares the preferences of all Americans—those who choose to live in a specific place and those who choose not to. This is not a new idea. Economic models of this kind date back four decades, and realtors have always known that ‘location, location, location’ dictated home price. Of course, home prices are only part of the story. Jobs also matter.

We have data on wages, by occupation and educational level, and the number of similarly qualified people within a county. We know about local employment volatility and the types of industry risk due to automation or changes in demand. Using this data, we can create statistically identical workers in each county by ‘controlling’ for individual and labor market conditions in each county. We can then compare wages for ‘identical’ workers across counties.

All things being equal, a business will be forced to pay the same worker more to live in an undesirable place than in a nice one. Conversely, workers will accept a discounted wage to be able to live somewhere nice. Thus, when choosing a place to live, workers make trade-offs between the wages they will earn against the cost of housing and access to amenities.

To check how accurate our measurement was, we looked at how population or job growth was affected by our measures. We found that our measure of ‘quality of place’ was strongly correlated with faster population and job growth. That’s just what the theory suggests.­­

The dynamics of ‘quality of place’ simply overwhelm almost everything else that states and local governments do to promote economic development. Residents naturally will pay more for a home in a nice place and accept slightly discounted wages to live where they prefer. This builds a self-reinforcing and virtuous cycle where local governments have more tax dollars available to spend on amenities, while businesses face lower labor costs. That’s why these places grow.

Since the 1990s, 80 percent of job growth has gone to college graduates, and the remainder to those who’ve taken college courses. These workers are mobile and more attuned to these wage and housing cost trade-offs than are less well-educated workers. One obvious implication of this is that for the businesses of the future, local land or tax costs are minimally important. What matters is locating your business in a city where lots of potential workers wish to move. Of course, this is also where your best customers will be located.

Indiana has largely missed these implications, despite obvious examples. If low-cost land or low taxes mattered, no family or business would move to Carmel, Fishers, Westfield or Zionsville. Instead, businesses and families would be flocking to Muncie, Connersville and Loogootee. They are not. Family location decisions are primarily driven by quality of life. So, which amenities lead to the highest quality of life?

Our housing and labor market measures provide a good snapshot of quality of life in every county of the U.S. That measure is highly correlated with population and job growth, but it doesn’t tell us which specific amenities of each community people care about. To know that, we have to see what types of amenities are most common in those places where labor and housing markets suggest are good places to live.

In analysis of 600-plus different amenities for each county, ranging from January temperatures to the number of churches, we obtained some pretty clear answers. Natural amenities such as nice weather and mountains are popular, but not strongly so—which is good news for Indiana. We also found that private amenities such as restaurants are more common in ‘good’ communities. Again, this is good for Indiana because these businesses follow families.

Unfortunately for Indiana, the two strongest amenities in our ‘quality of place’ rankings were school spending as a share of GDP and public safety. We rank poorly on both of these measures, which bodes poorly for economic and population growth across most of Indiana.

Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics in the Miller College of Business at Ball State University. Send comments to [email protected].