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And of course, there’s also the cost of housing. The mechanism is different, but the result is the same: everything else being equal, regions with higher incomes will have higher housing costs, simply because there are more people able to pay higher prices. (Of course, it’s not the entire story, because zoning rules and other regulations that limit the supply of housing can also be at work.)

Everything else being equal, regions with higher incomes will have higher housing costs

Set against these higher costs of living in high-income areas are benefits that go beyond the simple fact that incomes are higher there. For one thing, high-income areas are invariably large cities, and people value what large cities have to offer: cultural, recreational and economic opportunities that result from network effects that cannot be reproduced in smaller population centres. Given the choice, many — if not most — high earners would prefer to live in a high-cost, high-income city. Recruiting medical, educational and other professionals to small towns and rural areas is a challenge, even with their low costs of living.

But perhaps even more important is the question of social mobility and the opportunities that high income areas offer to children. As the University of Ottawa’s Miles Corak has recently documented, the chances of a child from a low-cost, rural area reaching the upper end of the income distribution are generally lower than those in high-cost urban area. (This no doubt explains much of the reticence of upper middle class professionals to leave their cities.)

The usual way of comparing the costs of living across regions is perhaps incomplete. Instead, we should be looking at what economists call the “opportunity cost:” the value of the best alternative. From this perspective, the high opportunity cost regions are probably the rural areas that can’t offer the benefits available in the cities.

So yes, there are many things to consider in debates about socio-economic status. But for the upper middle class, it still all comes down to income.

National Post

Stephen Gordon is a professor of economics at Université Laval.