tl;dr Summary: High cost workers should force employers to seek less expensive cities. The explanation for this not happening is that workers signal their quality by being in high cost areas since living there implies they are high enough quality to get a job that can allow them to afford living there.
Since high quality workers congregate there, employers stay despite the cost, to gain the benefit of a high quality workforce.
My preferred argument is that high labor costs increases supply which reduces the total cost of labor.
For example, in a city I need one DBA which costs me $100k. In the country I need two DBAs at $60k each, because if one leaves I'm not confident I can get another of sufficient skill before the business falls apart.
This applies less to larger businesses, which have internal economies of scale and so don't need to rely on the outside market as much. It also doesn't apply to those reliant on lower skilled labor which has a higher supply by default.
"skill-biased technological change causes a core-periphery bifurcation where the agglomeration of high-skill workers eventually constitutes a unique stable equilibrium."
Since high quality workers congregate there, employers stay despite the cost, to gain the benefit of a high quality workforce.