Real Estate Cost and the Spatial Distribution of Unobserved Human Capital: A Test Based on Obesity

Abstract

Tests based on years of education find that the return to human capital in cities varies inversely and average education varies directly with housing cost. Finally, there is evidence that labor productivity within cities varies directly with employment density and real estate cost. The income elasticity hypothesis explains these inter-city results based on the low income elasticity of demand for a primary residence. Urban producer theory explains both inter- and intra-city differences by assuming that labor is a congestible input so that producers substitute workers with more human capital when space costs rise.This paper conducts a new test of these two hypotheses. The new test uses obesity, rather than education. The empirical results confirm the theory that both among and within cities, there is a relation between differences in unobservable human capital and differences in the price of real estate. The results confirm the theoretical prediction that all forms of human capital respond to real estate cost, and effects of differences in education and obesity are similar. This implies that empirical studies of the distribution of and return to human capital should consider real estate costs.