Is Local Public Sector Rent Extraction Higher in Progressive Cities or High Amenity Cities?

Matthew E. Kahn

NBER Working Paper No. 23201
Issued in February 2017
NBER Program(s):Environment and Energy Economics, Labor Studies, Public Economics, Political Economy

Public finance theories of the median voter’s preferences and local public sector rent extraction posit that liberal cities and high amenity cities will feature a larger, better paid local public sector. Compensating differentials theory predicts that real wages will be lower in beautiful states and localities. Using both Federal and California city level administrative micro data, I study public sector compensation across space. At the Federal level, California workers are only paid 9% more than observationally identical workers in Alabama. Given the high California home prices, such workers are paying for the California amenities. Within California, beach cities hire more workers but pay them less in real terms. Liberal cities both pay public sector workers more and employ more of them. Liberal cities have much larger per-capita pension liabilities.

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Document Object Identifier (DOI): 10.3386/w23201

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