May 14, 2023
Re-Thinking Economic Development
The most recent Census survey reported 34 million Americans working fully remote, and more than 4 in 10 workers nationwide working remotely at least one day per week. To put this on a scale most of us will understand, there are now more households with a remote worker than there were Baby Boomer families.
We are in the early stages of the largest shock to household migration in the nation’s history. For parts of Indiana this is an economic opportunity greater than anything in our state’s history, far bigger than the Industrial Revolution. For other parts of Indiana, the remote work revolution will be an economic calamity, worse than the loss of factory jobs in the 20th century. The proliferation of remote work and its different impacts warrant a thorough and immediate policy discussion.
The gist of the issue surrounding remote work is simple. A large share of the most mobile families—perhaps half—no longer need to live near where they work. This newfound freedom unleashes a much broader geography of population and employment growth. Some places will have precisely what these new, highly mobile workers want; others will not. For an economist, it is a splendid natural experiment.
I am in the midst of academic work on the topic, so I have read nearly all the new research on post-COVID migration. From what we now know, two issues are emerging as leading explanations for household relocation. One is great for Indiana as a whole; the other offers optimism for fewer than half of Indiana counties.
First, the post-COVID migration appears to be penalizing places with restrictive housing policies. There are a few states, such as Vermont and Connecticut, and two dozen large cities where regulatory restrictions make it very costly to build new housing. Policies that restrict the type and size of homes make these places artificially expensive to live. That issue alone explains the exodus of people from New York, Seattle, San Francisco and other similar places.
Indiana, and much of the Midwest and South, have modest building restrictions. This helps to keep homes from experiencing artificially skyrocketing prices. So, for families seeking a single family home, many places in Indiana offer a good value. But, this doesn’t mean people are looking for a low cost of living. On the contrary, post-COVID population growth is still concentrated in higher-priced cities. As always, families are seeking value, not simply price, when choosing where to live.
Economists have a special name for the value proposition in choosing a home—‘quality of life.’ That search for a place with a high quality of life is now much more important than in the decade preceding COVID. Some of the research my colleagues and I are working on finds that quality of life considerations are three or four times more powerful in predicting population change than they were in the decade before COVID.
Just as a reminder, the way economists measure ‘quality of life’ is simply to compare the market price of statistically identical houses in each county or city. Houses worth more are located in higher quality of life places, and houses worth less are located in lower quality of life places. Typically, we would measure a labor market dimension for quality of life as well. But, for remote workers, that doesn’t hold.
This means that the factors that add value to a home are now playing a dominant role in location choices for the vast majority of moves. To put it in context, for every relocation of a factory or logistics job in each of the next ten years, there will be close to 100 potential relocations due to remote work. Unfortunately, many places in Indiana will struggle to take advantage of this opportunity They lack the amenities that affect home value, and hence the ability to attract remote workers.
I like to sort all amenities into three broad categories—natural amenities, private amenities and public amenities. The last few decades have seen a lot of research dedicated to assessing the relative contribution of these amenities to home values—and, hence, to migration. My colleagues and I ran a statistical model on 500-plus amenities, to assess which ones best predicted quality of life. The results of that calculation offer both caution and hope for Hoosier communities.
Indiana has a number of natural amenities, but we don’t do especially well in the characteristics that most Americans appear to prefer. We rank poorly for January temperatures and hilliness. We rank much higher on water frontage and on state/local recreational areas. Our trail systems receive special focus in many places. We are getting better at what we can change, but our real competitive advantage will need to come from elsewhere. The good news is that these natural amenities were fairly modest predictors of quality of life.
Indiana has among the best environments for private sector amenities. Large, densely populated places always have more variety, but the role of state and local policy is primarily to remove barriers to commerce. Here in Indiana, it is very easy to start and operate a business. We have one of the easiest tax climates in the developed world, and plenty of opportunities to open gyms, restaurants, groceries or recreation-focused businesses. Indiana is strong in our ability to develop private amenities, but these mostly follow people. So, these amenities play an important role in population retention, but they play a pretty modest role in attracting them.
Far and away the biggest factors that predict quality of life are those associated with local government quality. The effects of school spending or school quality are bigger predictors of quality of life than all other factors combined. In second place is crime rate—places with high rates of crime do very poorly in quality of life. In third place are several different measures of public health. These are all issues of investment in people.
The good news is that Indiana has several communities that rank really well on all three of these measures. The bad news is that most of the state ranks poorly on all three. Being brutally honest about these facts is necessary to reverse course. Indiana’s overall crime rate is twice that of New York’s, and that is not just a big-city problem. The health of our citizens is among the worst in the nation, and educational attainment across our state is now in long-term decline. This legislative session began to address these issues in some meaningful ways. However, a prosperous future will require a lot more investment in human capital than we have seen in recent decades.
About the Author
Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.
Big Savings for Ending Prevailing WageMy statistical models show that repealing state prevailing wage laws save taxpayers money.
Re-Thinking Economic Development A large share of the most mobile families—perhaps half—no longer need to live near where they work.
Money Illusion and InflationPrice fluctuation could cause inflation to last longer, but it didn’t cause the inflation, it simply extends the pain.View archives