All Growth Is Local: Housing Supply and the Economics of Mobility

A recent analysis suggests that the shortage of housing in major metropolitan areas, such as New York City and California’s Bay Area, costs the American economy about $2 trillion a year in lower wages and productivity.

In “Why Do Cities Matter? Local Growth and Aggregate Growth,” economists Chang-Tai Hsieh of the University of Chicago and Enrico Moretti of the University of California, Berkeley study how cities that determine national economic growth are hindered by constraints in their housing supply.

The costs of local zoning ordinances that restrict the supply of housing and raise home prices have long vexed economists and policymakers alike.

To estimate this cost, Hsieh and Moretti model a market in which housing supply is more elastic and can grow with increased demand, without raising home prices and rents. Without the burden of higher housing costs, workers are free to move to cities with the most productive and promising local economies.

To capture this effect, Hsieh and Moretti calculated the economic contributions of 220 cities and metros to the overall American economy and developed a spatial equilibrium model of the labor market.

Using data spanning over five decades from the US Census Bureau, the estimated elasticity of housing supply calculated by MIT economist Albert Saiz, and regulatory policy data via the Wharton Residential Land Use Regulatory Index, Hsieh and Moretti conducted an analysis of urban housing policy and the allocation of labor.

The evidence suggests significant differences between the economic growth of cities and their contributions to aggregate growth. In short, the local economies of Southern cities (think Atlanta, Miami, Phoenix, San Diego, and other cities in the southern half of the US) comprise more than three quarters of US economic growth.

The authors also detail a substantial increase in geographical income disparity between 1964 and 2009, indicating that worker productivity is increasing at different rates depending on location.

Hsieh and Moretti argue that this trend reflects an inefficient allocation of labor across US cities, much of which they attribute to the restrictive housing policies of major metropolitan areas. In essence, the shortage of housing supply acts as a barrier to entry, thereby preventing workers from moving to the most productive cities in the US.

Today, many workers are stuck in place earning a smaller salary than they might otherwise be able to command in another city. This lowers the income and well being of all US workers and imposes a large negative externality on the entire nation.

The authors estimate that, if the spatial dispersion of relative wages had not changed since 1964, GDP in 2009 would be 13.5 percent higher. This would account for a $1.7 trillion increase in total income, or $8,775 in additional wages per worker.

It is important to note that this assumption would require the relocation of more than half of America’s workers. The model illustrates an extreme where San Francisco would quadruple in size, and manufacturing hubs in the heartland would drastically shrink.

However, Hsieh and Moretti also articulate a more modest scenario, where 20 percent of workers change cities, to reflect current mobility patterns, resulting in a 6.5 percent increase in output.

In the long run, reforms in zoning regulations, adjustments to public services, and investments in infrastructure and transportation can help facilitate a more efficient distribution of labor.

Reducing land-use regulations in New York, San Francisco, and San Jose to match the median American city would expand their workforces and increase annual US output by approximately 10 percent.

This is part of a growing body of research connecting conditions in the housing market to trends in income inequality, labor productivity, and social mobility. In late 2015, at the Urban Institute, Jason Furman, Chairman of the President’s Council of Economic Advisors, emphasized the impact of local land-use regulations. Many economists argue that more reasonable zoning regulations could boost social mobility, increase incomes, and expand economic growth. Nonetheless, local politics obstruct the pursuit of prudent policy.

Incumbent homeowners have a private incentive to restrict housing supply, inflating individual home values while combating competition in the labor markets of highly productive cities. This economic rent of extraordinary returns for a concentrated interest could be at the expense of everyone else.

Article Source: Hsieh, Chang-Tai, and Enrico Moretti. “Why Do Cities Matter? Local Growth and Aggregate Growth,” National Journal of Economic Research (2015): 1-63.

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