Why North Dakota, not New York, may be the land of opportunity

C OUNTLESS PROTAGONISTS of great literature and film make the fateful decision to move to New York City in search of prosperity. This very persistent association seems sensible. Average wages in the Big Apple are double those in the typical American city. Yet the real rags-to-riches 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 apart these explanations has confounded economists for decades. A recent 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 economists—suggests an answer. Using proprietary census data, they tracked the wages of 12m people for nearly a decade as they moved between jobs in cities across America. This allowed them to separate out the effect of skills on average wages from the effect of the location premium—the je ne sais quoi about 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 two-thirds of the variation in earnings across cities. New York, San Jose and San Francisco have the highest wages in America primarily because they have the highest-skilled workers. Location premiums are real but smaller. They also have little to do with a place’s industrial mix. The billions of dollars localities spend on tax incentives to attract specific firms might thus be wrongheaded. Directly attracting high-skilled people (through amenities, for instance) may be a better tactic.

The Census Bureau’s disclosure rules prevent the publication of the precise values 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 Economist calculated how much more a worker in one of the lowest-remunerated areas of America (making an average annual salary of roughly $25,000) could make by moving. Location 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, extractive-industry economies like those in North Dakota offer substantial location premiums (as much as 26%), without the astronomic rents of the big cities. We await the next Great American novel from North Dakota. ■

Source: “Location, location, location”, by David Card, Jesse Rothstein and Moises Yi, 2021, working paper