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Franks, David (Oct 16, 2018)
The Hidden Relationship Between Housing, Migration,
and Inequality
Chicago Policy Review (Online)
Semester 1, 2019
ECON 7110
Weiqi Wang
Semester 1, 2019
Analysis of an Economic Newspaper Article
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 1
Table of Contents
1. Summary ...............................................................................................................................................2
2. Background ...........................................................................................................................................3
3. Analysis A ..............................................................................................................................................4
3.1. Land Regulations on High-Wage Regions ........................................................................4
3.2. Housing Price on Workers and Producers .........................................................................5
3.3. Wages in Different Regions ....................................................................................................8
4. Analysis B............................................................................................................................................ 11
4.1. Controlling Housing Cost ..................................................................................................... 11
4.2. Diminishing inequality of Income in Different Regions .............................................. 14
5. Recommendation ......................................................................................................................... 16
6. Appendix .......................................................................................................................................... 18
6.1. List of Figures .......................................................................................................................... 18
6.2. Reference .................................................................................................................................... 20
6.2. News attachment ...................................................................................................................... 21
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE– WANG 2
1. Summary
⚫ The gap between Poor and affluent regions in the United States narrowed between 1880
and 1980, however, the rate of convergence reduced drastically after the 1980s.
⚫ Ganong and Shoag argue that the sharp increase of housing cost in high-wage regions
affects migration pattern, which slows the income convergence.
⚫ In the past, both of high-skill and low-skill workers migrated from low-wage areas to
high-wage regions, but after increasing the land use regulation, housing prices in high-
wage regions with more restrictions were pushed up, forcing low-skilled workers to leave.
⚫ High-wage workers are less sensitive to the higher housing prices, which results in a
trend: high-skilled workers are concentrated in states with high wages and costs, while
low-skilled workers redirect to in states with low wages and costs.
⚫ After the 1980s, the convergence rates are greater in the states with fewer restrictions on
housing supply.
⚫ The research provides a way for the policymakers to solve the inequality by increasing
the housing stock and hence eliminate impediments of migration.
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE– WANG 3
2. Background
Income inequality is a thorny problem that plagues many countries. The problem could be
caused by gender, age, occupation, social status, ethnic group and even workplace (Bowers
& Chand, 2018; Foster, Gonzalez, & Lopes, 2019). If some fundamental factors remained, the
economy would eventually reach its steady state (Cesaratto, 1999), although the period could
be lengthy (King & Rebelo, 1989). The theory indicates that the income gap among
economies with the same culture and policies would gradually diminish. While this was true
in US for over a century, the gap was widened again in recent years, with the bottom 20% of
the population can only get less than 4% of the total income (Levine, 2015). The percentage
of poverty has also increased (Sara & Amanda Paulson Staff Writers of The Christian Science,
2005).
From the research on the supply side of labour market, Ganong and Shoag propose that since
1980s, the convergence rate in US has been reduced significantly (2017), and the
phenomenon can be associated with a slowdown in population flows into high-wage areas.
They attribute it to the shortage of house supply and soaring housing prices caused by land
control, which impedes the free flow of low-skilled migrants, reducing the income
convergence. As more egalitarian societies are needed for poor people, higher inequality
would increase the support of income redistributive policies. However, the effectiveness of
wage policies is often undermined by ethnical diversity and inaccurate data collection
processes (Cook, McKenzie, Natalier, & Young, 2015; Foster et al., 2019). The findings may
provide another effective way for policy makers to reduce inequality by increasing housing
stock.
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE– WANG 4
3. Analysis A
This section will focus on analyze the parties affected by the events in chronological order,
because of the persistence of the impacts.
3.1. Land Regulations on High-Wage Regions
Since land use restrictions began to increase in the United States from 1965, housing
supply has become difficult to satisfy new immigrants, which has led to higher house
prices (Franks, 2018). Through the method introduced by Ganong and Shoag to measure
the regulation, the income convergence is weakened more seriously in regions with
tighter regulations (2017). The difference could be resulted by the influence on housing
price.
Figure1
Supply, S2
Supply, S1
Demand, D2
Demand, D1
Quantity of house
supply per year, Q
Housing
price, P
0
P2
P1
Q2Q1
Housing Price in high-wage
regions with more regulations
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 5
Figure 2
The Figure 1 and 2 show that in high-wage regions, with strict and lenient land regulation
policies, increased immigration will lead to different outcomes in the distinguished regions.
In the region with more regulations, increase in the demand of house cannot be satisfied at
all, and due to the regulations of land, supply of house reduces, resulting in house prices to
soar, although more houses are traded. In contrast, in the regions with few regulations,
demand for new immigrants are met to some extent, although prices are risen slightly, and
the traded volume of houses rises drastically. The sharp rise in housing cost in high-wage
regions with more regulations also imposes great effects on workers and producers.
3.2. Housing Price on Workers and Producers
The exorbitant housing costs could lead to different consequens to high-skill workers and
low-skill workers, because the high-skill workers can earn much more money in high-
wage states, whereas the excess earnings for low-skill workers in high-wage states is
significantly lower, and the housing costs occupy larger ratio of their earnings.
Q2
Housing Price in high-wage
regions with few regulation
Housing
price, P
Supply, S1
Supply, S2
P2
Demand, D2P1
Demand, D1
0 Q1 Quantity of house
supply per year, Q
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 6
Figure 3
Figure 4
ℎ
ℎ
ℎ
ℎ
ℎ
eh
h e
h
0
Unit of housing
per year, ℎ
Unit of other goods per year, OCh
ℎ
ℎ
ℎ
ℎ
ℎ
ℎ
ℎ
ℎ
ℎ ℎ
ℎ
Uh
h
U
h
BL
h BLh
h
High-skill workers migrate from low-wage regions to high-wage regions
➢ BL
ℎ :
ℎ
−
O
ℎ
➢ BLℎ
ℎ :
ℎ
ℎ
ℎ −
ℎ
ℎ ℎ
ℎ
➢ eh
h: |ℎ
ℎ| =
ⅆℎ
ℎ
ⅆℎ
/
ⅆℎ
ℎ
ⅆℎ
=
PO
h
PH
h
➢ e
h: |
ℎ| =
ⅆ
ℎ
ⅆℎ
/
ⅆ
ℎ
ⅆℎ
=
PO
PH
➢
➢
Utility indifference curve for producers
Budget line for producers
ℎ
BL
BLh
eh
e
Uh
0
Unit of housing
per year,
Unit of other goods per year, OC
ℎ
ℎ
ℎ
U
Low-skill workers migrate from low-wage regions to high-wage regions
➢ BL
:
−
O
ℎ
ℎ
➢ BLℎ
:
ℎ
ℎ −
ℎ
➢ eh
: |ℎ
| =
ⅆℎ
ⅆ
/
ⅆℎ
ⅆ
=
PO
h
PH
h
➢ e
: |
| =
ⅆ
ⅆ
/
ⅆ
ⅆ
=
PO
PH
Budget line for producers
Utility indifference curve for producers
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 7
As shown in the Figure 3 and 4, when the low-skill workers and high-skill workers migrate
to the high-wage regions, although both of them may not afford buying as many house
unit as when they in the low-wage regions, the utility of high-skill workers still become
higher, whereas low-skill workers get lower utility when they migrate into high-wage
regions. This is because high-skill workers could receive significantly higher earnings in
high-wage regions, so that they can buy much more other units of goods, which is
enough to compensate their loss of buying less house unit. However, when the low-skill
workers move into the high-wage regions, although they may get more income, which
allow them buying more other products, the huge loss caused by the higher housing cost
cannot be totally offset.
The higher housing price also hurts new entrepreneurs or business owners who hope to
expand their plant, as the higher rent or property costs would increase their fixed production
costs (Perloff, 2018).
Figure 5
1
2
3
Amount of labour, L 0
Scale of Plant, C
0
1
0
0
Utility indifference curve for producers
Budget line for producers
Utility loss for the producer
1 < 2 < 3
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 8
Imagine that produce outdoor is impossible and, so that the producers need enough scale of
plant to contain labours and when they get the plant, they also need a certain amount of
labour to produce. The assumption means labour and plant are complementary goods.
Further assume that the producer has only limited amount of budget, and the utility of the
producer increases when more products can be produced, without considering whether the
products create profits, so that the producer would employ workers and rent plant to produce
as many products as possible within the budget limit. The Figure 5 illustrates that in such a
case, when the plant cost increases, the producers can open smaller plants then before, and
this also affects the workers they employ, leading to utility reduce as the products decline.
Prices may rise as a result in the long-run.
3.3. Wages in Different Regions
Because the utility of low-skill workers decreases if they live in the high-wage regions, they
redirect to the low-wage regions, whereas the high-skill workers still choose to live in the
high-wage regions, because the higher utility they can achieved there. This might cause the
income level of the high-wage regions further goes up, both in the long-run and short-run,
as the labour efficiency improved (Golgher, De Figueiredo, & Santolin, 2011).
Figure 6
Short-Run Wages in High-Wage Regions
Short-run supply of labour, 2
Short-run supply of labour, 1
Wages, US dollar
per unit, w
Workers per hour, L
0
Short-run demand of labour, 1
w2
w1
2 1
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 9
Figure 7
The Figures 6 and 7 show the labour markets in the high-wage regions. The wage per unit
product, which is called real wage (Mankiw, 2019), is equal to the marginal product of labour
(MPL). Because MPL diminishes if keeps capital constant, the demand of curves of labour have
downward slopes. For simplification, suppose the supply curves of labour are horizontal in
the short-run and vertical in the long-run, it can be seen that the real wage increases in both
periods, as the low-skill workers leave, resulting in the average labour efficiency becomes
higher in the short-run, and the labour amount reduces in the long-run, which elevates the
marginal product of labour. The decreased amount of labour in both time periods could
attribute to the reducing number of low-skill workers. Although the rest of the workers are
fortunate, a reduction in production capacity may raise prices in the regions. In addition, the
increase of costs could reduce the profits for producers. The related graphs are in the
Appendix.
Long-Run Wages in High-Wage Regions
Long-run supply of labour, 2
Short-run supply of labour, 1
Wages, US dollar
per unit, w
Workers per hour, L
0
Long-run demand of labour,
w2
w1
2 1
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 10
Figure 8
The situation in the low-wage regions is not as good as the high-wage regions. The increase
of labour supply further inhibits the wage level, which can be seen in Figure 8. As a
consequence, in states with more land regulations, exorbitant housing prices lead to a higher
proportion of highly skilled workers gathering in the high-wage areas, which further pushes
up the wages and production costs, whereas low-skilled workers tend to live in low-wage
regions with lower costs, resulting in greater inequality among different areas. In the following
section, several policies for resolving the problems will be shown.
Long-Run Wages in Low-Wage Regions
Long-run supply of labour, 2
Long-run supply of labour, 1 Wages, US dollar
per unit, w
Workers per hour, L
0
Long-run demand of labour,
w2
w1
2 1
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 11
4. Analysis B
According to the previous section, the main problems are resulted from the deficiency of
housing supply caused by land restriction, which pushes up housing prices and hinders free
movements of low-skill workers, increasing income inequality across regions. The potential
remedies are the following.
4.1. Controlling Housing Cost
To control house prices, the most direct way is to set up a price ceiling, then the price cannot
higher than the ceiling price. Like in the Graph 9, the house price cannot higher than .
However, In the policy, the house supply further reduces from Q to . As a result, although
in the ceiling price, some low-skill workers are more willing to move into high-wage regions,
as in the new house price, excess costs can be compensated by higher wages, fewer people
can buy the houses. Furthermore, because the excess demand for the house, black markets
may exist. Privileged people and people who have time to queue and channels to pay by
higher prices are more likely to get the purchase qualification. Some resources would waste
during the procedure. In addition, although the consumer surplus may increase, the producer
surplus decreases more, and the deadweight loss is produced.
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 12
Before Ceiling After ceiling Alternation
Consumer Surplus, CS A+B+E A+B+C C-E
Producer Surplus, PS C+D+F D -C-F
Welafare, W=CS + PS A+B+C+D+E+F A+B+C+D
-E-F = Δw = DWL
Figure 9 (Self-created according to (Perloff, 2018))
eC
e
A
E
F
Price ceiling
Supply of house, SH
Demand of house, DH
Quantity of house
supply per year, QH
Price of house, PH
(US Dollar)
QH,D Q QH,S = QC
0
B
C
D
Policy 1: Price Ceiling
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 13
Compared with price ceiling, a more sensible policy is a price support, which not only
reduces the house price but also increases the trade quantity.
Before Ceiling After ceiling Alternation
Consumer Surplus, CS a+b a+b+c+f c+f
Producer Surplus, PS
Government Expenditure (-)
c+d
0
b+c+d+e
-b-c-e-f-g
b+e
-b-c-e-f-g=
Welafare, W=CS + PS- A+b+c+d a+b+c+d-g
-g=Δw = DWL
Figure 10 (Self-created according to (Perloff, 2018))
E
Es
Policy 2: Price Support
Price of house, PH
(US Dollar)
b
g
c
f
d
qH,S 0 Quantity of house
supply per year, qH
Supply of house, Sh
Price support
Demand of house, Dh
qH
a
e
e
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 14
In the Figure 10, when government adopt the price support of ps
s, the quantity raises
from to qH,S, while the consumer could buy it in the price level . Nonetheless, as
the consumer surplus and producer surplus both increase, the government expenditure
is large, with a deadweight loss -g.
4.2. Diminishing inequality of Income in Different Regions
Except reducing house price, the government can reduce the inequality by redistributing
incomes. For example, government can set an income tax to high-wage workers, and using
the tax to transfer to low-wage workers, or organize large projects in low-income areas to
create jobs and thereby raise the wages. Although some tax burdens may be passed on to
the employer, they could elevate the prices of production or reduce the production quantity.
Although the living costs in high-wage regions raise, the government could lift the land
regulation or use the above policies to mitigate the house costs. The effects of lift regulations
and tax high-wage workers are shown in the Figure 12.
Figure 11
Policy 3 – Create Jobs by Government
Long-run supply of labour, − Wages, US dollar
per unit, W
W2
Long-run demand of labour, LR − 2
W1
Workers per hour, L
Long-run demand of labour, − 1
0
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 15
Figure 12
Although these policies can solve the related problems, if they are not adopted skillfully, new
economic problems may arise, so the next section will discuss a comprehensive strategy to
pursue an optimal outcome.
E2
E1
Housing
price, P
Supply, S1
Supply, S2
P1
Demand, D2
P2
Demand, D1
0 Q2Q1 Quantity of house
supply per year, Q
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 16
5. Recommendation
To solve the most fundamental problem, the housing cost, without too much government
expenditure, a policy mix may necessary, including cancelling land regulations, a price support
and a price ceiling.
The figure 13 demonstrates the effects of the policy mix. After lifting the regulations, the
house supply increases, raising the quantity. While the price support is imposed, the quantity
further increases to Q2
∗ , and the consumer can buy it through a very low price (merely an
assumption). Due to the effect of cancelling land regulations, the tax burden shrinks to i+f-
g-h. The price ceiling has no effect after lifting the regulations, but it could be a guarantee
to inhibit the agents charge excess prices. The policy mix is for regions with serious
inequality, the price support can be eliminated, if the issue is not too urgent.
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 17
Before Ceiling After ceiling Alternation
Consumer Surplus, CS a+b a+b+c+d+f+i+k c+d++f+i+k
Producer Surplus, PS
Government Expenditure (-)
c+d
0
b+c+d+e+f+i+j
-b-c-d-e-f-g-h-
i-j-k
b+e+f+i+j
-b-c-d-e-f-g-h-i-
j-k =
Welafare, W=CS + PS- a+b+c+d a+b+c+d+i+f-g-h
i+f-g-h=Δw = DWL
Figure 13
E1
∗
E∗
f
ES
∗
Supply of house, S∗
Price Support
Demand of house, D∗
Q∗
a
e
e
Quantity of house
supply per year, Q∗
Price of house, ∗
(US Dollar)
Q1
∗
∗
0
b
c
d
Recommendation Policy Mix
g
i
k
1
∗
Price Ceiling
Supply of house after
lifting regulations, S1
∗
h
j
Q2
∗
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 18
6. Appendix
6.1. List of Figures
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 19
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 20
6.2. Reference
Bowers, M. L., & Chand, D. E. (2018). An Examination of Wage and Income Inequality within the
American Farmworker Community. Journal on Migration and Human Security, 6(3), 182-
191. Retrieved from https://doi.org/10.1177/2331502418786707.
doi:10.1177/2331502418786707
Cesaratto, S. (1999). Savings and economic growth in neoclassical theory. Cambridge journal of
economics, 23(6), 771-793.
Cook, K., McKenzie, H., Natalier, K., & Young, L. (2015). Institutional processes and the production
of gender inequalities: The case of Australian child support research and administration.
Critical Social Policy, 35(4), 512-534. doi:10.1177/0261018315599731
Foster, J., Gonzalez, L. J., & Lopes, C. (2019). Income Inequality, Ethnic Diversity, and State Minimum
Wages. Social Science Quarterly, 100(3), 825-837. doi:10.1111/ssqu.12580
Franks, D. (2018). The Hidden Relationship Between Housing, Migration, and Inequality.(highlights
of "Why Has Regional Income Convergence in the U.S. Declined?"). In.
Ganong, P., & Shoag, D. (2017). Why has regional income convergence in the U.S. declined?
Journal of Urban Economics, 102, 76-90. Retrieved from
http://www.sciencedirect.com/science/article/pii/S0094119017300591.
doi:https://doi.org/10.1016/j.jue.2017.07.002
Golgher, A. B., De Figueiredo, L., & Santolin, R. (2011). MIGRATION AND ECONOMIC GROWTH IN
BRAZIL: EMPIRICAL APPLICATIONS BASED ON THE SOLOW-SWAN MODEL.(Report).
Developing Economies, 49(2), 148. doi:10.1111/j.1746-1049.2011.00127.x
King, R., & Rebelo, S. (1989). Transitional Dynamics and Economic Growth in the Neoclassical
Model. NBER Working Paper Series, 3185. doi:10.3386/w3185
Levine, L. (2015). THE U.S. INCOME DISTRIBUTION AND MOBILITY: TRENDS AND INTERNATIONAL
COMPARISONS *. Current Politics and Economics of the United States, Canada and
Mexico, 17(4), 669-694.
Mankiw, N. G. (2019). Macroeconomics (Tenth Edition.. ed.): New York, NY
Worth Publishers.
Perloff, J. M. (2018). Microeconomics (8th edition.. ed.): New York, NY : Pearson.
Sara, B. M., & Amanda Paulson Staff Writers of The Christian Science, M. (2005). Despite more jobs,
US poverty rate rises
Percentage of Americans in poverty grew for the fourth straight year, the US Census Bureau
reported Tuesday. In (pp. 02).
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 21
6.3. News attachment
The Hidden Relationship Between
Housing, Migration, and Inequality
Franks, David . Chicago Policy Review (Online) ; Chicago (Oct 16, 2018).
(ENGLISH)
In the November issue of the Journal of Urban Economics, Peter Ganong of Chicago’s Harris
School of Public Policy and Daniel Shoag of the Harvard Kennedy School investigate a
troubling question: “Why has regional income convergence in the U.S. declined?“ In
economics, convergence—or the “catch-up effect”—is the hypothesis that per capita incomes
in poor and rich economies eventually converge because incomes in poor economies grow
more quickly than incomes in rich economies. For a hundred years, from 1880 to 1980, this
hypothesis held true in the United States: Per capita incomes in poorer states indeed rose
more quickly than per capita incomes in richer states, resulting in a shrinking gap between
high-income and low-income states. Since the 1980s, however, the rate of convergence
slowed dramatically. Motivated by the observation that low-skilled workers were migrating
away from high-wage areas while those areas experienced a disproportionate rise in housing
costs, they build a corresponding model of the relationship between wages, housing costs,
skill level, and region.
In the November issue of the Journal of Urban Economics, Peter Ganong of Chicago’s
Harris School of Public Policy and Daniel Shoag of the Harvard Kennedy School
investigate a troubling question: “Why has regional income convergence in the U.S.
declined?“
In economics, convergence—or the “catch-up effect”—is the hypothesis that per capita
incomes in poor and rich economies eventually converge because incomes in poor
economies grow more quickly than incomes in rich economies. For a hundred years, from
1880 to 1980, this hypothesis held true in the United States: Per capita incomes in poorer
states indeed rose more quickly than per capita incomes in richer states, resulting in a
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 22
shrinking gap between high-income and low-income states. Since the 1980s, however, the
rate of convergence slowed dramatically. To explain this phenomenon, most research has
focused on the demand side of the labor market; by contrast, Ganong and Shoag explore the
supply side. Specifically, they investigate how housing costs and migration patterns impact
the labor supply.
Historically, both high- and low-skilled workers migrated from low-wage states to high-wage
states, slowing wage growth in high-wage states and accelerating wage growth in low-wage
states. But since the 1980s, both the level of migration and the rate of income convergence
between high- and low-wage states declined. Ganong and Shoag show that differences in
housing costs contributed to this effect. Increased land use regulation since 1965 made it
more difficult for developers to build new housing in response to population growth. Over
time, this decreased housing supply relative to demand, pushing up housing costs in areas
with more regulations.
Ganong and Shoag use data from the American Community Survey to track interstate
movement and data from State Economic Areas and Public Use Microdata Areas to
construct time series measuring wages, rents/housing prices, and skill levels. Motivated by
the observation that low-skilled workers were migrating away from high-wage areas while
those areas experienced a disproportionate rise in housing costs, they build a corresponding
model of the relationship between wages, housing costs, skill level, and region.
The authors then measure land use regulation intensity by counting all incidents of the
phrase “land use” in state appeals and Supreme Court rulings, under the assumption that
any impactful regulation would have been contested. They find that before 1980 there was
a strong relationship between income growth and current income, with lower-income states
growing faster than high-income states. But since 1980, states with a less constrained
supply of housing experienced greater income convergence.
High-skilled workers are less sensitive to higher housing costs than low-skilled workers
because they generally spend a smaller share of their incomes on housing. Over time, this
variation in sensitivity to housing costs produced a change in migration patterns among high-
and low-skilled workers. In the past, both high- and low-skilled workers were relatively free to
move from state to state in search of higher wages, driving income convergence across the
country. However, rising housing costs since the 1980s constrained the movement of low-
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 23
skilled workers, forcing low-skilled workers away from higher-wage states since 1995. This is
because income after housing costs is actually lower for some low-skilled workers in high-
wage regions than in low-wage regions. For example, after housing costs are factored in, a
janitor in NYC may earn less than a janitor with a comparable wage in Mississippi. Over time,
this “regional sorting” results in a concentration of high-skilled workers in high-wage, high-cost
states and low-skilled workers in low-wage, low-cost states.
This research offers a partial explanation for increasing inequality since the 1980s. Much talk
of addressing inequality is oriented at the federal level with proposals for more progressive
tax structures and income redistribution. However, this research reveals an opportunity for
policymakers at the state and local levels to make significant, if gradual, impacts on
inequality by using the tools at their disposal to increase the housing stock and so reduce
barriers to migration. The authors estimate that if interstate income convergence had
continued from the 1980s at the pre-1980 rate, the increase in hourly wage inequality from
1980 to 2010 would have been 8 percent smaller. Going forward, more research is needed to
figure out exactly how large a role housing costs played in the post-1980 decline in income
convergence, relative to other causes.
Article source: Ganong, Peter &Daniel Shoag. “Why has regional income convergence in the
U.S. declined?”
Journal of Urban Economics. 102 (2017): 76–90
The Hidden Relationship Between Housing, Migration,
and Inequality
Chicago Policy Review (Online)
Semester 1, 2019
ECON 7110
Weiqi Wang
Semester 1, 2019
Analysis of an Economic Newspaper Article
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 1
Table of Contents
1. Summary ...............................................................................................................................................2
2. Background ...........................................................................................................................................3
3. Analysis A ..............................................................................................................................................4
3.1. Land Regulations on High-Wage Regions ........................................................................4
3.2. Housing Price on Workers and Producers .........................................................................5
3.3. Wages in Different Regions ....................................................................................................8
4. Analysis B............................................................................................................................................ 11
4.1. Controlling Housing Cost ..................................................................................................... 11
4.2. Diminishing inequality of Income in Different Regions .............................................. 14
5. Recommendation ......................................................................................................................... 16
6. Appendix .......................................................................................................................................... 18
6.1. List of Figures .......................................................................................................................... 18
6.2. Reference .................................................................................................................................... 20
6.2. News attachment ...................................................................................................................... 21
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE– WANG 2
1. Summary
⚫ The gap between Poor and affluent regions in the United States narrowed between 1880
and 1980, however, the rate of convergence reduced drastically after the 1980s.
⚫ Ganong and Shoag argue that the sharp increase of housing cost in high-wage regions
affects migration pattern, which slows the income convergence.
⚫ In the past, both of high-skill and low-skill workers migrated from low-wage areas to
high-wage regions, but after increasing the land use regulation, housing prices in high-
wage regions with more restrictions were pushed up, forcing low-skilled workers to leave.
⚫ High-wage workers are less sensitive to the higher housing prices, which results in a
trend: high-skilled workers are concentrated in states with high wages and costs, while
low-skilled workers redirect to in states with low wages and costs.
⚫ After the 1980s, the convergence rates are greater in the states with fewer restrictions on
housing supply.
⚫ The research provides a way for the policymakers to solve the inequality by increasing
the housing stock and hence eliminate impediments of migration.
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE– WANG 3
2. Background
Income inequality is a thorny problem that plagues many countries. The problem could be
caused by gender, age, occupation, social status, ethnic group and even workplace (Bowers
& Chand, 2018; Foster, Gonzalez, & Lopes, 2019). If some fundamental factors remained, the
economy would eventually reach its steady state (Cesaratto, 1999), although the period could
be lengthy (King & Rebelo, 1989). The theory indicates that the income gap among
economies with the same culture and policies would gradually diminish. While this was true
in US for over a century, the gap was widened again in recent years, with the bottom 20% of
the population can only get less than 4% of the total income (Levine, 2015). The percentage
of poverty has also increased (Sara & Amanda Paulson Staff Writers of The Christian Science,
2005).
From the research on the supply side of labour market, Ganong and Shoag propose that since
1980s, the convergence rate in US has been reduced significantly (2017), and the
phenomenon can be associated with a slowdown in population flows into high-wage areas.
They attribute it to the shortage of house supply and soaring housing prices caused by land
control, which impedes the free flow of low-skilled migrants, reducing the income
convergence. As more egalitarian societies are needed for poor people, higher inequality
would increase the support of income redistributive policies. However, the effectiveness of
wage policies is often undermined by ethnical diversity and inaccurate data collection
processes (Cook, McKenzie, Natalier, & Young, 2015; Foster et al., 2019). The findings may
provide another effective way for policy makers to reduce inequality by increasing housing
stock.
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3. Analysis A
This section will focus on analyze the parties affected by the events in chronological order,
because of the persistence of the impacts.
3.1. Land Regulations on High-Wage Regions
Since land use restrictions began to increase in the United States from 1965, housing
supply has become difficult to satisfy new immigrants, which has led to higher house
prices (Franks, 2018). Through the method introduced by Ganong and Shoag to measure
the regulation, the income convergence is weakened more seriously in regions with
tighter regulations (2017). The difference could be resulted by the influence on housing
price.
Figure1
Supply, S2
Supply, S1
Demand, D2
Demand, D1
Quantity of house
supply per year, Q
Housing
price, P
0
P2
P1
Q2Q1
Housing Price in high-wage
regions with more regulations
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 5
Figure 2
The Figure 1 and 2 show that in high-wage regions, with strict and lenient land regulation
policies, increased immigration will lead to different outcomes in the distinguished regions.
In the region with more regulations, increase in the demand of house cannot be satisfied at
all, and due to the regulations of land, supply of house reduces, resulting in house prices to
soar, although more houses are traded. In contrast, in the regions with few regulations,
demand for new immigrants are met to some extent, although prices are risen slightly, and
the traded volume of houses rises drastically. The sharp rise in housing cost in high-wage
regions with more regulations also imposes great effects on workers and producers.
3.2. Housing Price on Workers and Producers
The exorbitant housing costs could lead to different consequens to high-skill workers and
low-skill workers, because the high-skill workers can earn much more money in high-
wage states, whereas the excess earnings for low-skill workers in high-wage states is
significantly lower, and the housing costs occupy larger ratio of their earnings.
Q2
Housing Price in high-wage
regions with few regulation
Housing
price, P
Supply, S1
Supply, S2
P2
Demand, D2P1
Demand, D1
0 Q1 Quantity of house
supply per year, Q
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 6
Figure 3
Figure 4
ℎ
ℎ
ℎ
ℎ
ℎ
eh
h e
h
0
Unit of housing
per year, ℎ
Unit of other goods per year, OCh
ℎ
ℎ
ℎ
ℎ
ℎ
ℎ
ℎ
ℎ
ℎ ℎ
ℎ
Uh
h
U
h
BL
h BLh
h
High-skill workers migrate from low-wage regions to high-wage regions
➢ BL
ℎ :
ℎ
−
O
ℎ
➢ BLℎ
ℎ :
ℎ
ℎ
ℎ −
ℎ
ℎ ℎ
ℎ
➢ eh
h: |ℎ
ℎ| =
ⅆℎ
ℎ
ⅆℎ
/
ⅆℎ
ℎ
ⅆℎ
=
PO
h
PH
h
➢ e
h: |
ℎ| =
ⅆ
ℎ
ⅆℎ
/
ⅆ
ℎ
ⅆℎ
=
PO
PH
➢
➢
Utility indifference curve for producers
Budget line for producers
ℎ
BL
BLh
eh
e
Uh
0
Unit of housing
per year,
Unit of other goods per year, OC
ℎ
ℎ
ℎ
U
Low-skill workers migrate from low-wage regions to high-wage regions
➢ BL
:
−
O
ℎ
ℎ
➢ BLℎ
:
ℎ
ℎ −
ℎ
➢ eh
: |ℎ
| =
ⅆℎ
ⅆ
/
ⅆℎ
ⅆ
=
PO
h
PH
h
➢ e
: |
| =
ⅆ
ⅆ
/
ⅆ
ⅆ
=
PO
PH
Budget line for producers
Utility indifference curve for producers
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 7
As shown in the Figure 3 and 4, when the low-skill workers and high-skill workers migrate
to the high-wage regions, although both of them may not afford buying as many house
unit as when they in the low-wage regions, the utility of high-skill workers still become
higher, whereas low-skill workers get lower utility when they migrate into high-wage
regions. This is because high-skill workers could receive significantly higher earnings in
high-wage regions, so that they can buy much more other units of goods, which is
enough to compensate their loss of buying less house unit. However, when the low-skill
workers move into the high-wage regions, although they may get more income, which
allow them buying more other products, the huge loss caused by the higher housing cost
cannot be totally offset.
The higher housing price also hurts new entrepreneurs or business owners who hope to
expand their plant, as the higher rent or property costs would increase their fixed production
costs (Perloff, 2018).
Figure 5
1
2
3
Amount of labour, L 0
Scale of Plant, C
0
1
0
0
Utility indifference curve for producers
Budget line for producers
Utility loss for the producer
1 < 2 < 3
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 8
Imagine that produce outdoor is impossible and, so that the producers need enough scale of
plant to contain labours and when they get the plant, they also need a certain amount of
labour to produce. The assumption means labour and plant are complementary goods.
Further assume that the producer has only limited amount of budget, and the utility of the
producer increases when more products can be produced, without considering whether the
products create profits, so that the producer would employ workers and rent plant to produce
as many products as possible within the budget limit. The Figure 5 illustrates that in such a
case, when the plant cost increases, the producers can open smaller plants then before, and
this also affects the workers they employ, leading to utility reduce as the products decline.
Prices may rise as a result in the long-run.
3.3. Wages in Different Regions
Because the utility of low-skill workers decreases if they live in the high-wage regions, they
redirect to the low-wage regions, whereas the high-skill workers still choose to live in the
high-wage regions, because the higher utility they can achieved there. This might cause the
income level of the high-wage regions further goes up, both in the long-run and short-run,
as the labour efficiency improved (Golgher, De Figueiredo, & Santolin, 2011).
Figure 6
Short-Run Wages in High-Wage Regions
Short-run supply of labour, 2
Short-run supply of labour, 1
Wages, US dollar
per unit, w
Workers per hour, L
0
Short-run demand of labour, 1
w2
w1
2 1
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 9
Figure 7
The Figures 6 and 7 show the labour markets in the high-wage regions. The wage per unit
product, which is called real wage (Mankiw, 2019), is equal to the marginal product of labour
(MPL). Because MPL diminishes if keeps capital constant, the demand of curves of labour have
downward slopes. For simplification, suppose the supply curves of labour are horizontal in
the short-run and vertical in the long-run, it can be seen that the real wage increases in both
periods, as the low-skill workers leave, resulting in the average labour efficiency becomes
higher in the short-run, and the labour amount reduces in the long-run, which elevates the
marginal product of labour. The decreased amount of labour in both time periods could
attribute to the reducing number of low-skill workers. Although the rest of the workers are
fortunate, a reduction in production capacity may raise prices in the regions. In addition, the
increase of costs could reduce the profits for producers. The related graphs are in the
Appendix.
Long-Run Wages in High-Wage Regions
Long-run supply of labour, 2
Short-run supply of labour, 1
Wages, US dollar
per unit, w
Workers per hour, L
0
Long-run demand of labour,
w2
w1
2 1
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 10
Figure 8
The situation in the low-wage regions is not as good as the high-wage regions. The increase
of labour supply further inhibits the wage level, which can be seen in Figure 8. As a
consequence, in states with more land regulations, exorbitant housing prices lead to a higher
proportion of highly skilled workers gathering in the high-wage areas, which further pushes
up the wages and production costs, whereas low-skilled workers tend to live in low-wage
regions with lower costs, resulting in greater inequality among different areas. In the following
section, several policies for resolving the problems will be shown.
Long-Run Wages in Low-Wage Regions
Long-run supply of labour, 2
Long-run supply of labour, 1 Wages, US dollar
per unit, w
Workers per hour, L
0
Long-run demand of labour,
w2
w1
2 1
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 11
4. Analysis B
According to the previous section, the main problems are resulted from the deficiency of
housing supply caused by land restriction, which pushes up housing prices and hinders free
movements of low-skill workers, increasing income inequality across regions. The potential
remedies are the following.
4.1. Controlling Housing Cost
To control house prices, the most direct way is to set up a price ceiling, then the price cannot
higher than the ceiling price. Like in the Graph 9, the house price cannot higher than .
However, In the policy, the house supply further reduces from Q to . As a result, although
in the ceiling price, some low-skill workers are more willing to move into high-wage regions,
as in the new house price, excess costs can be compensated by higher wages, fewer people
can buy the houses. Furthermore, because the excess demand for the house, black markets
may exist. Privileged people and people who have time to queue and channels to pay by
higher prices are more likely to get the purchase qualification. Some resources would waste
during the procedure. In addition, although the consumer surplus may increase, the producer
surplus decreases more, and the deadweight loss is produced.
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 12
Before Ceiling After ceiling Alternation
Consumer Surplus, CS A+B+E A+B+C C-E
Producer Surplus, PS C+D+F D -C-F
Welafare, W=CS + PS A+B+C+D+E+F A+B+C+D
-E-F = Δw = DWL
Figure 9 (Self-created according to (Perloff, 2018))
eC
e
A
E
F
Price ceiling
Supply of house, SH
Demand of house, DH
Quantity of house
supply per year, QH
Price of house, PH
(US Dollar)
QH,D Q QH,S = QC
0
B
C
D
Policy 1: Price Ceiling
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 13
Compared with price ceiling, a more sensible policy is a price support, which not only
reduces the house price but also increases the trade quantity.
Before Ceiling After ceiling Alternation
Consumer Surplus, CS a+b a+b+c+f c+f
Producer Surplus, PS
Government Expenditure (-)
c+d
0
b+c+d+e
-b-c-e-f-g
b+e
-b-c-e-f-g=
Welafare, W=CS + PS- A+b+c+d a+b+c+d-g
-g=Δw = DWL
Figure 10 (Self-created according to (Perloff, 2018))
E
Es
Policy 2: Price Support
Price of house, PH
(US Dollar)
b
g
c
f
d
qH,S 0 Quantity of house
supply per year, qH
Supply of house, Sh
Price support
Demand of house, Dh
qH
a
e
e
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 14
In the Figure 10, when government adopt the price support of ps
s, the quantity raises
from to qH,S, while the consumer could buy it in the price level . Nonetheless, as
the consumer surplus and producer surplus both increase, the government expenditure
is large, with a deadweight loss -g.
4.2. Diminishing inequality of Income in Different Regions
Except reducing house price, the government can reduce the inequality by redistributing
incomes. For example, government can set an income tax to high-wage workers, and using
the tax to transfer to low-wage workers, or organize large projects in low-income areas to
create jobs and thereby raise the wages. Although some tax burdens may be passed on to
the employer, they could elevate the prices of production or reduce the production quantity.
Although the living costs in high-wage regions raise, the government could lift the land
regulation or use the above policies to mitigate the house costs. The effects of lift regulations
and tax high-wage workers are shown in the Figure 12.
Figure 11
Policy 3 – Create Jobs by Government
Long-run supply of labour, − Wages, US dollar
per unit, W
W2
Long-run demand of labour, LR − 2
W1
Workers per hour, L
Long-run demand of labour, − 1
0
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 15
Figure 12
Although these policies can solve the related problems, if they are not adopted skillfully, new
economic problems may arise, so the next section will discuss a comprehensive strategy to
pursue an optimal outcome.
E2
E1
Housing
price, P
Supply, S1
Supply, S2
P1
Demand, D2
P2
Demand, D1
0 Q2Q1 Quantity of house
supply per year, Q
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 16
5. Recommendation
To solve the most fundamental problem, the housing cost, without too much government
expenditure, a policy mix may necessary, including cancelling land regulations, a price support
and a price ceiling.
The figure 13 demonstrates the effects of the policy mix. After lifting the regulations, the
house supply increases, raising the quantity. While the price support is imposed, the quantity
further increases to Q2
∗ , and the consumer can buy it through a very low price (merely an
assumption). Due to the effect of cancelling land regulations, the tax burden shrinks to i+f-
g-h. The price ceiling has no effect after lifting the regulations, but it could be a guarantee
to inhibit the agents charge excess prices. The policy mix is for regions with serious
inequality, the price support can be eliminated, if the issue is not too urgent.
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 17
Before Ceiling After ceiling Alternation
Consumer Surplus, CS a+b a+b+c+d+f+i+k c+d++f+i+k
Producer Surplus, PS
Government Expenditure (-)
c+d
0
b+c+d+e+f+i+j
-b-c-d-e-f-g-h-
i-j-k
b+e+f+i+j
-b-c-d-e-f-g-h-i-
j-k =
Welafare, W=CS + PS- a+b+c+d a+b+c+d+i+f-g-h
i+f-g-h=Δw = DWL
Figure 13
E1
∗
E∗
f
ES
∗
Supply of house, S∗
Price Support
Demand of house, D∗
Q∗
a
e
e
Quantity of house
supply per year, Q∗
Price of house, ∗
(US Dollar)
Q1
∗
∗
0
b
c
d
Recommendation Policy Mix
g
i
k
1
∗
Price Ceiling
Supply of house after
lifting regulations, S1
∗
h
j
Q2
∗
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 18
6. Appendix
6.1. List of Figures
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 19
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 20
6.2. Reference
Bowers, M. L., & Chand, D. E. (2018). An Examination of Wage and Income Inequality within the
American Farmworker Community. Journal on Migration and Human Security, 6(3), 182-
191. Retrieved from https://doi.org/10.1177/2331502418786707.
doi:10.1177/2331502418786707
Cesaratto, S. (1999). Savings and economic growth in neoclassical theory. Cambridge journal of
economics, 23(6), 771-793.
Cook, K., McKenzie, H., Natalier, K., & Young, L. (2015). Institutional processes and the production
of gender inequalities: The case of Australian child support research and administration.
Critical Social Policy, 35(4), 512-534. doi:10.1177/0261018315599731
Foster, J., Gonzalez, L. J., & Lopes, C. (2019). Income Inequality, Ethnic Diversity, and State Minimum
Wages. Social Science Quarterly, 100(3), 825-837. doi:10.1111/ssqu.12580
Franks, D. (2018). The Hidden Relationship Between Housing, Migration, and Inequality.(highlights
of "Why Has Regional Income Convergence in the U.S. Declined?"). In.
Ganong, P., & Shoag, D. (2017). Why has regional income convergence in the U.S. declined?
Journal of Urban Economics, 102, 76-90. Retrieved from
http://www.sciencedirect.com/science/article/pii/S0094119017300591.
doi:https://doi.org/10.1016/j.jue.2017.07.002
Golgher, A. B., De Figueiredo, L., & Santolin, R. (2011). MIGRATION AND ECONOMIC GROWTH IN
BRAZIL: EMPIRICAL APPLICATIONS BASED ON THE SOLOW-SWAN MODEL.(Report).
Developing Economies, 49(2), 148. doi:10.1111/j.1746-1049.2011.00127.x
King, R., & Rebelo, S. (1989). Transitional Dynamics and Economic Growth in the Neoclassical
Model. NBER Working Paper Series, 3185. doi:10.3386/w3185
Levine, L. (2015). THE U.S. INCOME DISTRIBUTION AND MOBILITY: TRENDS AND INTERNATIONAL
COMPARISONS *. Current Politics and Economics of the United States, Canada and
Mexico, 17(4), 669-694.
Mankiw, N. G. (2019). Macroeconomics (Tenth Edition.. ed.): New York, NY
Worth Publishers.
Perloff, J. M. (2018). Microeconomics (8th edition.. ed.): New York, NY : Pearson.
Sara, B. M., & Amanda Paulson Staff Writers of The Christian Science, M. (2005). Despite more jobs,
US poverty rate rises
Percentage of Americans in poverty grew for the fourth straight year, the US Census Bureau
reported Tuesday. In (pp. 02).
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 21
6.3. News attachment
The Hidden Relationship Between
Housing, Migration, and Inequality
Franks, David . Chicago Policy Review (Online) ; Chicago (Oct 16, 2018).
(ENGLISH)
In the November issue of the Journal of Urban Economics, Peter Ganong of Chicago’s Harris
School of Public Policy and Daniel Shoag of the Harvard Kennedy School investigate a
troubling question: “Why has regional income convergence in the U.S. declined?“ In
economics, convergence—or the “catch-up effect”—is the hypothesis that per capita incomes
in poor and rich economies eventually converge because incomes in poor economies grow
more quickly than incomes in rich economies. For a hundred years, from 1880 to 1980, this
hypothesis held true in the United States: Per capita incomes in poorer states indeed rose
more quickly than per capita incomes in richer states, resulting in a shrinking gap between
high-income and low-income states. Since the 1980s, however, the rate of convergence
slowed dramatically. Motivated by the observation that low-skilled workers were migrating
away from high-wage areas while those areas experienced a disproportionate rise in housing
costs, they build a corresponding model of the relationship between wages, housing costs,
skill level, and region.
In the November issue of the Journal of Urban Economics, Peter Ganong of Chicago’s
Harris School of Public Policy and Daniel Shoag of the Harvard Kennedy School
investigate a troubling question: “Why has regional income convergence in the U.S.
declined?“
In economics, convergence—or the “catch-up effect”—is the hypothesis that per capita
incomes in poor and rich economies eventually converge because incomes in poor
economies grow more quickly than incomes in rich economies. For a hundred years, from
1880 to 1980, this hypothesis held true in the United States: Per capita incomes in poorer
states indeed rose more quickly than per capita incomes in richer states, resulting in a
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 22
shrinking gap between high-income and low-income states. Since the 1980s, however, the
rate of convergence slowed dramatically. To explain this phenomenon, most research has
focused on the demand side of the labor market; by contrast, Ganong and Shoag explore the
supply side. Specifically, they investigate how housing costs and migration patterns impact
the labor supply.
Historically, both high- and low-skilled workers migrated from low-wage states to high-wage
states, slowing wage growth in high-wage states and accelerating wage growth in low-wage
states. But since the 1980s, both the level of migration and the rate of income convergence
between high- and low-wage states declined. Ganong and Shoag show that differences in
housing costs contributed to this effect. Increased land use regulation since 1965 made it
more difficult for developers to build new housing in response to population growth. Over
time, this decreased housing supply relative to demand, pushing up housing costs in areas
with more regulations.
Ganong and Shoag use data from the American Community Survey to track interstate
movement and data from State Economic Areas and Public Use Microdata Areas to
construct time series measuring wages, rents/housing prices, and skill levels. Motivated by
the observation that low-skilled workers were migrating away from high-wage areas while
those areas experienced a disproportionate rise in housing costs, they build a corresponding
model of the relationship between wages, housing costs, skill level, and region.
The authors then measure land use regulation intensity by counting all incidents of the
phrase “land use” in state appeals and Supreme Court rulings, under the assumption that
any impactful regulation would have been contested. They find that before 1980 there was
a strong relationship between income growth and current income, with lower-income states
growing faster than high-income states. But since 1980, states with a less constrained
supply of housing experienced greater income convergence.
High-skilled workers are less sensitive to higher housing costs than low-skilled workers
because they generally spend a smaller share of their incomes on housing. Over time, this
variation in sensitivity to housing costs produced a change in migration patterns among high-
and low-skilled workers. In the past, both high- and low-skilled workers were relatively free to
move from state to state in search of higher wages, driving income convergence across the
country. However, rising housing costs since the 1980s constrained the movement of low-
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 23
skilled workers, forcing low-skilled workers away from higher-wage states since 1995. This is
because income after housing costs is actually lower for some low-skilled workers in high-
wage regions than in low-wage regions. For example, after housing costs are factored in, a
janitor in NYC may earn less than a janitor with a comparable wage in Mississippi. Over time,
this “regional sorting” results in a concentration of high-skilled workers in high-wage, high-cost
states and low-skilled workers in low-wage, low-cost states.
This research offers a partial explanation for increasing inequality since the 1980s. Much talk
of addressing inequality is oriented at the federal level with proposals for more progressive
tax structures and income redistribution. However, this research reveals an opportunity for
policymakers at the state and local levels to make significant, if gradual, impacts on
inequality by using the tools at their disposal to increase the housing stock and so reduce
barriers to migration. The authors estimate that if interstate income convergence had
continued from the 1980s at the pre-1980 rate, the increase in hourly wage inequality from
1980 to 2010 would have been 8 percent smaller. Going forward, more research is needed to
figure out exactly how large a role housing costs played in the post-1980 decline in income
convergence, relative to other causes.
Article source: Ganong, Peter &Daniel Shoag. “Why has regional income convergence in the
U.S. declined?”
Journal of Urban Economics. 102 (2017): 76–90
