Amenities and Fringe Benefits: Omitted Variable Bias

Introduction In a groundbreaking empirical test of ideas advanced by Roback 1982 and Rosen 1979, Blomquist, Berger, and Hoehn 1988 demonstrated that amenities are highly valued by people and that those values are expressed in both land and labor markets. Sketching the argument, one would expect that people would move to initially desirable locations until some mix of lower wages (as the supply of labor increases) and higher rents (as the demand for land increases) offsets the locations' desirability. Indeed, in this manner one can gauge the "quality-of-life" of various locations by adding up what is paid in land and labor markets (the Blomquist, Berger, and Hoehn contribution). Graves and Waldman 1991 show that this equilibrium model is consistent with the observed migration behavior of the elderly retired (that is, one observes retirees moving to areas where more of the compensation for amenities occurs in labor markets that are no longer relevant). The economics literature in this area contrasts markedly with the work of geographers (e.g. the many Rand-McNally "Places Rated Almanacs," that arbitrarily give equal weight to various traits that are valued on a subjective one-to-five scale). The economics approach described here uses peoples' observed willingness-to-pay for various amenities, hence should, we think, be greatly preferred. In this paper, we extend this literature to the consideration of fringe benefits. The notion is that it is full wage compensation that will be lowered in desirable locations relative to elsewhere, ceteris paribus, and that full compensation is comprised of a mix of explicit wage payments and a fringe package. This would not matter if there were a "standard" fringe package that did not vary across locations, but we shall see that fringes vary greatly over space, and in the expected direction - nice locations offer inferior fringes in addition to lower hourly wages. The wage portion of the full compensation (lower wages and higher rents in nice locations) should be comprised of the impacts on both wages and fringe payments. Total employee benefits nationwide have grown from 18.7 percent of payroll in 1951 to 38.4 percent in 1990. The adjustment of wage compensation to incorporate fringe benefits will be seen to be a non-trivial adjustment: amenities are substantially more important than previously thought and the regional implications are pronounced. Section II discusses procedures necessary for incorporation of the effects of variation in fringe benefits on amenity valuation. In this section strong empirical effects are seen despite significant data limitations. Section III concludes with some broader implications of the paper. II Analysis Table 1 presents the regional data that underlie the paper (unfortunately employee benefits are unavailable at either the county or state level). Columns (1) and (2), however, aggregate to the regional level the county-level 1980 information on wage and rent compensation of Blomquist, Berger, and Hoehn 1988 (we wish to thank Glenn Blomquist for providing us with this county level information). The regional population-weighted averages for the U.S. are then calculated and used to create a relative wage and rent compensation number in Columns (4) and (5). For example, West's raw wage compensation of $469.98 is $283.70 below the national average compensation of $753.68 in the data; similarly rent compensation in the West is $583.60 higher than the U.S. average. Adding the negative wage compensation to the positive rent compensation results in an overall amenity payment for the West of $299.90, ignoring employee fringe benefits, as seen in Column (7). The raw employee benefits for the same period, seen in Column (3), are calculated from information on total employee benefits as a percent of payroll multiplied by average payroll per employee, by region. Again considering the West, payroll per employee in 1980 was $12,795 and 35. …