Curse of the College Town

College towns evoke images of brick buildings surrounded by expansive lawns and large old houses on wide, leafy streets. Look at any of the “best places to live” lists and you will see many college towns – small to mid-sized cities that are home to large universities. College towns offer an appealing mix of amenities, like events, restaurants and good schools, but they also tend to offer something else – a high cost of living and low wages, particularly for people with a college degree.

Montana’s two main college towns, Missoula and Bozeman, fit this pattern. Both rank high on various best places to live lists. For instance, Missoula currently ranks 32rd and Bozeman 34th on’s Top 100 Best Places to Live. Yet, both have a high cost of living and low wages, particularly for people with college degrees.

Missoula’s cost of living is higher than most other places. It ranks 107th out of 382 metro areas and resembles the cost of living in cities like Atlanta, Milwaukee or New Orleans. This may seem paradoxical, but it reflects the fact that large and expensive places exert disproportionate weight on the U.S. level.

While cost of living data is not available for Bozeman, data is available on housing costs, which drive differences in cost of living across places. Housing in Bozeman costs about 10 percent more than in Missoula. This suggests that Bozeman’s cost of living resembles that of Salt Lake City, Tampa or Houston.

Missoula and Bozeman’s high cost of living is not matched by high wages, particularly for people with college degrees. Median earnings for Missoulians over the age 24 with a bachelor’s degree is less than $32,000. This ranks 907th out of 917 metropolitan and micropolitan areas in the United States. Bozeman’s college graduates earn a bit more – approximately $36,000, but this still ranks 861st. Residents of both cities with graduate or professional degrees rank a little higher, 744th and 580th respectively, but their earnings are still well below the national average.

Low earnings in Missoula and Bozeman disproportionately affect the college educated. On average, across the United States, college-graduates earn 60 percent more than high school graduates. However, in Missoula college-graduates earn only 23 percent more than high school graduates and in Bozeman its only 25 percent more.

In spite of their low wages, Missoula and Bozeman have large college-educated populations. Forty percent of Missoulians and 47 percent of Bozeman residents over the age 24 have at least a bachelor’s degree. This ranks Missoula 39th and Bozeman 18th among the 917 metro and micro areas.

But Missoula and Bozeman are not unique. Their income and housing costs resemble places like Eugene, Oregon; Lawrence, Kansas; Gainesville, Florida; and State College, Pennsylvania – all college towns. A similar pattern repeats in college towns across the country. Relative to communities the same size, housing costs are 6 to 7 percent higher and median earnings for people with bachelor’s degrees are 8 to 10 percent lower in college towns.

Thus, at least part of the pattern observed in Missoula and Bozeman reflect their status as college towns. The important question is why? Why are incomes for college graduates low in college towns and why are housing costs high relative to income?

There are two simple answers for why wages are low. First, college towns have more students and students frequently work low wage, part-time jobs compatible with their school work. As such, part of lower median earnings for people with bachelor’s degrees may reflect a higher share of graduate students in the area.

Second, and more important, low wages reflect basic forces of supply and demand. Many students fall for the city where they attend school and want to stay, while other college graduates enjoy living in college towns. These forces help explain why college towns tend to have 40 percent more college graduates than similar sized, non-college towns.

But not every place with a large supply of college-educated workers offers low wages for college graduates – quite the opposite. Large and smart cities like Washington D.C. and Boston; exclusive amenity/resort towns like Jackson Hole, Wyoming and Hilton Head, South Carolina; and small state capitols like Concord, New Hampshire and Juneau, Alaska, offer 15 to 18 percent higher median annual earnings for their college graduates.

To understand why, one must not only ask why supply is high, but also why demand is low. The presence of a university does not by itself depress demand. There are plenty of cities with universities that have many college graduates and high wages, like San Francisco or Seattle. But these places have other large industries that help define the regional economy – such places have colleges, but are not college towns.

Relative to these other educated places, college towns tend to have a lower share of workers in high wage occupations and industries. College town workers also tend to earn lower wages for the “same” job. These forces reflect a weakness in their traded sector – the part of the economy that sells goods and services to people in other places.

Places with productive traded sectors tend to have higher earnings. While skilled creative workers are an important part of achieving this, other factors also matter. A strong traded sector reflects a combination of skilled workers, useful physical infrastructure, valuable natural resources, productive social norms and institutions, and talented entrepreneurs.

Low incomes are not by themselves the big problem – cost also matters. People who live in a low income, low cost region, could end up consuming the exact same set of goods and services as people who live in a high income, high cost region. The problem facing college towns is that they combine high cost with low income. Residents of a college town may not be able to consume the same set of goods and services that they might be able to consume elsewhere.

The fact that wages are low relative to the cost of living speaks to the fact that college towns are nice places to live. When identifying areas with a high quality of life, economists look for places where income is low relative to the cost of living. If people choose to live in place with lower incomes and higher costs, that place must offer a desirable quality of life, otherwise people would move away.

No place is perfect. Every city wants to offer good jobs, an affordable cost of living and a great quality of life. But no place can have it all. Income will be too low, housing costs will be too high or quality of life will be threatened by congestion or crime. If a place offers something better than what is available elsewhere, people will move there and this will cause wages to fall, cost of living to rise or congestion to increase.

There is no singular best place, there is only the best place for you. Some people might prefer the bright lights of the big city, while others want the bright stars of the country. Ultimately, the existence of people in a place suggests that it is the best place for them; otherwise they would move to someplace better.

The question for college towns like Missoula and Bozeman is, “Are they the place they want to be?” That is, are they achieving their desired mix of jobs and income, cost of living and quality of life?

It is important to note that places cannot simply become what they want to be; they must also consider, what they can be. External forces like geography, history, state and federal policy and global economic trends limit what is possible. Furthermore, it is not always obvious what is possible or what is desirable. While I might hope that Missoula and Bozeman develop more high-wage jobs and increase their populations, others may fear the accompanying growth in housing costs or changes to their quality of life.

Thus, for college towns like Missoula and Bozeman, low income and high costs are only a problem to the extent they cannot achieve their desired mix of jobs, cost and quality of life. Perspectives of the ideal mix will differ and every path a college town might take comes with tradeoffs.