Elsevier

Journal of Urban Economics

Volume 102, November 2017, Pages 76-90
Journal of Urban Economics

Why has regional income convergence in the U.S. declined?

https://doi.org/10.1016/j.jue.2017.07.002Get rights and content

Abstract

The past thirty years have seen a dramatic decline in the rate of income convergence across states and in population flows to high-income places. These changes coincide with a disproportionate increase in housing prices in high-income places, a divergence in the skill-specific returns to moving to high-income places, and a redirection of low-skill migration away from high-income places. We develop a model in which rising housing prices in high-income areas deter low-skill migration and slow income convergence. Using a new panel measure of housing supply regulations, we demonstrate the importance of this channel in the data.

Introduction

The convergence of per-capita incomes across US states from 1880 to 1980 is one of the most striking patterns in macroeconomics. For over a century, incomes across states converged at a rate of 1.8% per year. Over the past thirty years, this relationship has weakened dramatically, as shown in Fig. 1.1 The convergence rate from 1990 to 2010 was less than half the historical norm, and in the period leading up to the Great Recession there was virtually no convergence at all.

Fig. 1 also plots what we call “directed migration”: the relationship between population growth and income per capita across states. Prior to 1980, people were moving on net from low-income places to high-income places. Like convergence, this historical pattern has declined over the last thirty years.

To better understand the decline of income convergence and directed migration, this paper makes three contributions to the regional economics literature. First, we document that increased housing prices have differential effects on the returns to migration and the migration flows of low- and high-skill workers. Second, we develop a model which shows that changes in the elasticity of housing supply in high-income places can explain the decline in directed migration and income convergence. Third, we construct a novel panel measure of land use regulations, which are a determinant of the housing supply elasticity, and use it to empirically confirm predictions from the model.

The mechanism we propose for explaining the decline in income convergence can be understood through an example. Through most of the twentieth century, both janitors and lawyers earned considerably more in the tri-state New York area (NY, NJ, CT) than their colleagues in the Deep South (AL, AR, GA, MS, SC). This was true in both nominal terms, and after adjusting for differences in housing prices.2 Migration responded to these differences, and this labor reallocation reduced income gaps over time.

Today, though nominal premiums to being in the New York area are large for these two occupations, the high costs of housing in the New York area have changed this calculus. Lawyers continue to earn much more in the New York area in both nominal terms and net of housing costs, but janitors now earn less in the New York area after subtracting housing costs than they do in the Deep South.3 This sharp difference arises in part because for lawyers in the New York area, housing costs are equal to 21% of their income, while housing costs are equal to 52% of income for New York area janitors. While it may still be worth it for lawyers to move to New York, high housing prices offset the nominal wage gains for janitors.

Our paper’s first contribution is to show that the patterns described above for janitors and lawyers generalize to all low- and high-skill workers. Prior research shows that income differences across states have been increasingly capitalized into housing prices in the last fifty years (Van Nieuwerburgh, Weill, 2010, Glaeser, Gyourko, Saks, 2005, Gyourko, Mayer, Sinai, 2013). We calculate the gains to moving separately by skill group in terms of income net of housing costs using Census data. Through most of the twentieth century, the returns net of housing costs to migrating from a low-income place to a high-income place were similar for low- and high-skill workers. However, low-skill workers spend a larger fraction of their income on housing. For these low-skill workers, rising house prices have eroded the gains from migration. We document that migration flows have responded to these changing returns to migration. In the mid-twentieth century, low- and high-skill workers moved from low-income to high-income places. In recent years, as high-skill workers move to high-income places, low-skill workers leave. We call this phenomenon “skill sorting”.

We build a model to formalize the mechanism by which directed migration could have driven income convergence in the past, and to explore the consequences of increased land use regulations for directed migration and convergence. Our model analyzes two locations that have a fixed difference in productivity. When the population in the more productive location rises, the marginal product of labor falls due to downward-sloping labor demand. When the local housing supply is unconstrained, workers of all skill types will choose to move to the more productive location. This migration pushes down wages and skill differences, generating income convergence. Low-skill workers are more sensitive to changes in housing prices. When housing supply becomes constrained in the productive area, the model makes three predictions: (1) total migration to the productive location is reduced, (2) migration of low-skill workers in particular slows, and (3), as a result of the first two changes in migration, income convergence slows.

To test the model, we construct a new panel measure of land use regulation. Our measure is a scaled count of the number of appeals and supreme court decisions for each state that mention “land use,” as tracked through an online database. We validate this measure of regulation using existing cross-sectional survey data. To the best of our knowledge, this is the first national panel measure of land use regulations in the US.4 We show that tight land use regulations weaken the historic link between high incomes and new housing permits. Instead, income differences across places become more capitalized into housing prices.

Using differential regulation patterns across states, we show that the impact of housing supply limits in the data matches the three predictions from the model. Constrained housing supply reduces total migration to high-income areas. Net migration of workers of all skill types from low-income to high-income places is replaced by skill sorting. Finally, income convergence persists among places unconstrained by these regulations, but it is diminished in areas with supply constraints.

To assess whether housing supply constraints are causing a reduction in income convergence, and not the other way around, we conduct two tests. First, we use a state’s historical tendency to regulate land use as measured by the number of land use cases per capita around 1965. We use this measure of regulations because it predates the decline in income convergence, which occurred around 1980. We find that income convergence rates fell after 1985, but only in those places with a high tendency to regulate land use. Second, we repeat this exercise using another predetermined measure based on geographic land availability from Saiz (2010). Again, we find income convergence declined the most in areas with supply constraints.

In this paper, we highlight a single channel – labor mobility – which can help explain both regional income convergence through 1980 and its subsequent disappearance from 1980 to 2010. Much of the literature on regional convergence has focused on the role of capital, racial discrimination, or sectoral reallocations.5 We build on an older tradition of work by economic historians (Easterlin, 1958, Williamson, 1965) as formalized by Braun (1993), in which directed migration drives convergence. Finally, much of the existing literature on regional patterns since 1980 in the U.S. emphasizes changes in labor demand from skill-biased technological change and trade (Autor, Dorn, 2013, Diamond, 2016, Artuç, Chaudhuri, McLaren, 2010). In contrast, our channel emphasizes the role of housing supply constraints.

The study of regional convergence is also important for understanding trends in inequality. From 1940 to 1980, the standard deviation of hourly earnings (a common measure of inequality) significantly declined. We calculate that cross-state convergence in wages accounted for 34% of this drop.6 Had convergence continued apace through 2010, implementing the same methodology indicates that the increase in hourly wage inequality from 1980 to 2010 would have been 8% smaller. Thus, our results imply that forces such as housing regulation that slow regional convergence also increase inequality.

The remainder of the paper proceeds as follows. In Section 2, we show that increased housing prices have differential impacts on low- and high-skill workers. In Section 3, we develop a model where directed migration drives convergence and an increase in housing supply constraints changes migration patterns and reduces convergence. Section 4 introduces a new measure of land use regulation, and directly assesses its impact on convergence, and Section 5 concludes.

Section snippets

Motivating facts on housing prices and migration

Fig. 1 shows a dramatic reduction in income convergence as well as in directed migration from low-income to high-income places.7 In this section, we show that changes in housing prices may be reducing directed migration

A simple model of regional migration, housing prices, and convergence

To formalize the link between housing markets, skill-specific migration, and convergence, we develop a model of regional economies. In the text of the paper, we present a simple model where downward-sloping regional labor demand curves and non-homothetic housing demand combine to generate migration and convergence patterns similar to those shown in Fig. 1. In Online Appendix A, we present a richer model that we use for quantitative calibration.17

A panel measure of land use regulations

In this section, we develop a new measure of land use regulations based on state appeals court records and use it to test the three empirical predictions made by the model. Land use regulations are a good proxy for the parameter ξ in the model. Our new measure is, to the best of our knowledge, the first panel of housing supply regulations covering the United States.22

Conclusion

For more than 100 years, per-capita incomes across U.S. states were strongly converging and population flowed from low-income to high-income areas. In this paper, we claim that these two phenomena are related. By increasing the available labor in a region, migration drove down wages and induced convergence in human capital levels.

Over the past thirty years, both the flow of population to high-income areas and income convergence have slowed considerably. We show that the end of directed

Acknowledgments

We would like to thank Marios Angeletos, Robert Barro, George Borjas, Gary Chamberlain, Raj Chetty, Gabe Chodorow-Reich, David Dorn, Bob Ellickson, Emmauel Farhi, Bill Fischel, Dan Fetter, Edward Glaeser, Claudia Goldin, Joe Gyourko, Larry Katz, and seminar participants at Harvard, Tel Aviv, Bar Ilan, Dartmouth and the NBER Summer Institute for their valuable feedback. Shelby Lin provided outstanding research assistance. We thank Erik Hurst for alerting us to the end of regional convergence and

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