The thesis advanced by economists Daniel Shoag and Peter Ganong in their paper, “Why Has Personal Income Convergence in the U.S. Declined,” is not new. Market-oriented urbanists have made the same connections for years: that land use restrictions drive up the cost of housing, and that high housing costs aggravate income inequality by throttling the flow of lower-income households to wealthier regions offering greater economic opportunity. But Shoag and Ganong have tapped a new set of data to make that case more ironclad than ever.
The convergence of per capita incomes across U.S. states from 1880 to 1980 is “one of the most striking patterns in macroeconomics,” the authors state; for more than a century, incomes converged.at a rate of 1.8% per year. Then between 1990 to 2010, there was virtually no convergence at all. Prior to 1980, Americans were moving, on net, from poor places to richer places. Since then, higher-skill workers still have been moving but lower skill workers have tended to stay put.
Economic theory would suggest that in a free labor market, workers would tend to migrate to states and metropolitan regions offering better prospects for jobs and wages — as in fact occurred for more than a century. However, inter-state mobility has declined as housing prices have increased significantly more in high-income states than in low-income states, thus pricing lower-income workers out of expensive housing markets.
“Although skilled adults are still moving to high income locations, unskilled adults are actually weakly migrating away from these locations,” the authors find. “High housing prices in high nominal income areas have made these areas prohibitively costly for unskilled workers.”
Although the study was published in 2015, it has been getting increased exposure. Ganong presented the paper in a July Brookings Institute conference on municipal finance, and the Wall Street Journal highlighted the findings in an article today.
The driving force behind higher housing prices is land use regulation. Since 1977, they write, “it has been widely accepted that municipalities’ land use restrictions raise property values for incumbent homeowners. … Local variation in regulations is not randomly assigned; it is the product of substantial work by local governments and regulatory bodies.”
Hypothesizing that restrictive land use policies might explain the phenomenon, Shoag and Ganong devised a clever new measure — the frequency with which the phrase “land use” appeared in state appellate court cases over time. The number of land use court cases served as a proxy for the intensity of land use regulation in each state.
A simple back of the envelope calculation … finds that cross-state convergence accounted for approximately 30% of the drop in hourly wage inequality from 1940 to 1980, and that had convergence continued apace through 2010, the increase in hourly wage inequality from 1980 to 2010 would have been approximately 10% smaller. The U.S. is increasingly characterized by segregation along economic dimensions, with limited access for most workers to America’s most productive cities and their amenities.
Bacon’s bottom line: Shoag and Ganong have documented one of the major drivers of income inequality in the country, and it has nothing to do with globalization, automation, illegal immigration or tax breaks for the rich. Sadly, the phenomenon is totally absent from our debased media commentary and presidential debate.
If anything, the authors understate the role of high housing prices because their database makes it possible to compare states only. If we look at migration patterns within Virginia, for instance, we would see the same trends at work. Thousands of unemployed and underemployed workers in Southside and Southwest Virginia find are discouraged from seeking superior work opportunities in high-wage Northern Virginia by Virginia’s strictest land use controls and the highest cost of housing.
There are legitimate reasons for some land use controls. New development should be required to mitigate its environmental impacts, such as erosion and sediment control. A case also can be made for limiting development in order to preserve unique historical or cultural attributes. But land use restrictions are far more typically put into place to restrict growth, with the goal of holding down increases by dampening the demand for schools, roads and other public amenities. But most restrictions create unintended consequences, of which the lofty price of housing is just the most visible.