The quality-of-life (QoL) of a region describes an index of goods for which typically no market exists (such as clean air or nice weather), which makes it difficult to identify their market value directly. For decades economists have therefore relied on the variation of real wages across regions to identify quality-of-life indirectly as ‘compensating differentials’: regions with low real wages will have to feature larger quality-of-life to attract highly mobile workers.
Workers are, however, highly immobile due to costs to migration that typically exceed the equivalent of an annual income, argue Gabriel Ahlfeldt, Fabian Bald, Duncan Roth and Tobias Seidel in a study to be presented at the annual congress of the European Economic Association in August 2020.
If workers are immobile, then quality-of-life differentials between regions must be even larger to induce workers to move between regions. Accounting for costs to migration in their novel measure of quality-of-life, the authors find that there is almost twice as much variation in QoL across labour market regions as compared to the canonical measure.
At the core of economics stands the central assumption that individuals are quick to react to incentives. Thus, one should expect to see substantial in-migration into regions where workers expect to earn high real wages, unless there are region-specific unobservables that compensate for lower income. Data on spatial variation in real wages and employment have therefore widely been used to identify the distribution of quality-of-life.
Using information on the entirety of German workers on a daily basis, the authors find nonetheless that the majority of German workers move between different labour market regions at most once over their lifetime. This suggests that workers are much less mobile than expected according to the canonical framework, which the authors attribute to (non-monetary) migration costs. These occur as a relocation increases the distance from one’s home region (and therefore the distance to loved ones or own culture). As a consequence, the direct link from real wages to quality-of-life breaks down in the presence of frictional migration.
To identify quality-of-life in the presence of migration costs, the authors propose a novel framework, which keeps the intuition of quality-as-life as ‘compensating differentials’ to observable wages and rents, but specifically accounts for frictional migration.
Their framework makes it possible to identify all fundamentals of the German economy (e.g. quality-of-life, productivities and housing supply) when workers face substantial costs to migration but incorporate highly sophisticated expectations about the future developments of the economy in their migration decisions.
Furthermore and due to the incorporation of migration costs the authors’ framework allows to analyse the impact of any policy-induced shock on fundamentals (e.g. QoL, housing supply, productivity) not only on total welfare in a region as in the canonical framework, but also on inequality both between regions and between different worker groups inside regions.
The authors find that differences in quality-of-life across German regions are almost twice as large as in the canonical framework and that increases in QoL are especially large in the most populous regions such as Berlin, Munich, Hamburg and Frankfurt. If migration is subject to substantial costs, then ever larger differences in real income or quality-of-life than in the canonical framework are necessary to explain observable migration flows of workers between German regions.
It will therefore take very substantial policy-induced changes in quality-of- life of regions (e.g. decreasing pollution or fighting crime) to induce workers to move to low-income regions.
(Figure 1: proposed QoL-measure) (Figure 2: canonical QoL-measure)
Authors: Gabriel Ahlfeldt (London School of Economics), Fabian Bald (University Duisburg-Essen), Duncan Roth (Institute for Employment Research) and Tobias Seidel (University Duisburg-Essen)
Contact: Fabian Bald
Email: fabian.bald@uni-due.de
Telephone: +49 1525 8219639
Personal Homepage: https://sites.google.com/view/fabianbald