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Higher housing prices and land-use restrictions are largely to blame for the slowdown in the shrinking of the income gap between the rich and the poor in America. That’s the finding in a new Harvard Kennedy School (HKS) Faculty Working Paper titled “Why Has Regional Convergence in the U.S. Stopped?” co-authored by HKS assistant professor Daniel Shoag.
The paper outlines a new economic model and uses novel data on housing restrictions to help explain why income convergence across the United States, a constant and consistent trend for 100 years, has drastically declined over the past thirty years.
“…the convergence relationship was quite strong through 1980, with a convergence rate of 2.1% per year,” the authors write. “In the last thirty years, this pattern has largely disappeared”
Previous studies have focused on the roles of capital or technological change on income convergence. This latest study drills down more intently on the effects of housing and its impact on labor markets, human capital, migration patterns, and income.
“In our model, a reduction in the elasticity of housing supply in rich areas shifts the economy from one in which labor markets clear through net migration to one in which labor markets clear through skill-sorting,” the authors conclude. “As prices rise the returns to living in productive areas fall for low-skilled households, and their migration patterns diverge from the migration patterns of the high-skilled households. We find patterns consistent with these predictions in the data.”
The authors argue that their findings should be a wake-up call to policymakers when designing land use restrictions and housing market regulations.
Daniel Shoag is an assistant professor of public policy at Harvard Kennedy School and an affiliate of the Taubman Center for State and Local Government. His research focuses on fiscal policy, state and local pension plans, and regional macroeconomics.