We need to make it easier for US workers to get to where the good jobs are

The jobless rate is falling faster in Decatur, Ill. — an aging industrial city south of Chicago — than almost anywhere else in America. More than three percentage points in the past year. But look closer, as Wall Street Journal reporters Mark Peters and Ben Leubsdorf do, “and this city of 75,000 resembles many communities across the industrial Midwest, where the unemployment rate is falling fast in part because workers are disappearing: moving away, retiring or no longer looking for a job.”

The relocation issue is particularly interesting. The piece tells the story of a laid-off Caterpillar worker, Denny Ryder, who left Decatur last year for Winston-Salem, N.C. He found work at a Caterpillar contractor:

While Mr. Ryder was confident he could find a job in Decatur, he didn’t feel it would match the wages and benefits at Caterpillar, where he worked for 19 years. “I probably could have lost a lot of money and found a job in Decatur,” said Mr. Ryder, who has taken to life in North Carolina, from enjoying the hills to swimming in the ocean for the first time.

Bad for Decator, perhaps, but good for this individual worker. The ability to relocate and find work is a positive aspect for any economy, and there should be more of it in this one. AEI’s Michael Strain recommends that US unemployment programs should include a relocation subsidy:

A program like this already exists under the Trade Adjustment Assistance program. Certain workers who have secured employment in a new city can receive a relocation allowance of up to 90 percent of the “reasonable and necessary expenses” of moving, plus an additional lump-sum payment of up to $1,250. The unemployment-insurance system could create a similar program for the long-term unemployed, possibly financed by letting them take an advance on their UI benefits.

Actually, it would also be pretty awesome if it was easier for the employed to move to cities where their skills could be put to better use. In a new study, “Why Do Cities Matter? Local Growth and Aggregate Growth,” Chang-Tai Hsieh and Enrico Moretti finds that while New York, San Francisco, and San Jose were three of America’s most productive cities from 1964 through 2009,  “growth in these three cities had limited benefits for the U.S. as a whole. The reason is that the main effect of the fast productivity growth in New York, San Francisco, and San Jose was an increase in local housing prices and local wages, not in employment.” From the study’s summary:

Despite some of the strongest rate of local growth, New York, San Francisco and San Jose were only responsible for a small fraction of U.S. growth in this period. By contrast, almost half of aggregate US growth was driven by growth of cities in the South. We then provide a normative analysis of potential growth. We show that the dispersion of the conditional average nominal wage across US cities doubled, indicating that worker productivity is increasingly different across cities. We calculate that this increased wage dispersion lowered aggregate U.S. GDP by 13.5%. Most of the loss was likely caused by increased constraints to housing supply in high productivity cities like New York, San Francisco and San Jose. Lowering regulatory constraints in these cities to the level of the median city would expand their work force and increase U.S. GDP by 9.5%. We conclude that the aggregate gains in output and welfare from spatial reallocation of labor are likely to be substantial in the U.S., and that a major impediment to a more efficient spatial allocation of labor are housing supply constraints. These constraints limit the number of US workers who have access to the most productive of American cities. In general equilibrium, this lowers income and welfare of all US workers.

More Americans should be living and working in and near high productivity cities. More from the study:

Our results thus suggest that local land use regulations that restrict housing supply in dynamic labor markets have important externalities on the rest of the country. Incumbent homeowners in high wage cities have a private incentive to 35 restrict housing supply. By doing so, these voters de facto limit the number of US workers who have access to the most productive of American cities. For example, Silicon Valley—the area between San Francisco and San Jose—has some of the most productive labor in the globe.

But, as Glaeser (2014) puts it, “by global urban standards, the area is remarkably low density” due to land use restrictions. In a region with some of the most expensive real estate in the world, surface parking lots, 1-story buildings and underutilized pieces of land are still remarkably common due to land use restrictions. While the region’s natural amenities—its hills, beaches and parks—are part of the attractiveness of the area, there is enough underutilized land within its urban core that housing units could be greatly expanded without any reduction in natural amenities. Our findings indicate that in general equilibrium, this would raise income and welfare of all US workers.

In principle, one possible way to minimize the negative externality created by housing supply constraints in high TFP cities would be for the federal government to constraint U.S. municipalities’ ability to set land use regulations. Currently, municipalities set land use regulations in almost complete autonomy since the effect of such regulations have long been thought as only local. But if such policies have meaningful nationwide effects, then the adoption of federal standard intended to limit negative externalities may be in the aggregate interest.

An alternative is the development of public transportation that link local labor markets characterized by high productivity and high nominal wages to local labor markets characterized by low nominal wages. For example, a possible benefit of high speed train currently under construction in California is to connect low-wage cities in California’s Central Valley — Sacramento, Stockton, Modesto, Fresno — to high productivity jobs in the San Francisco Bay Area. This could allow the labor supply to the San Francisco economy to increase overnight without changing San Francisco housing supply constraints.

An extreme example is the London metropolitan area. A vast network of trains and buses allows residents of many cities in Southern England – including far away cities like Reading, Brighton and Bristol– to commute to high TFP employers located in downtown London. Another example is the Tokyo metropolitan area. While London and Tokyo wages are significantly above the UK and Japan averages, they would arguably be even higher in the absence of these rich transportation networks. Our argument suggests that UK and Japan GDP are significantly larger due to the transportation network.

Even a better bus system would be a good start. Also, new research suggests where kids live can have a pretty big impact on their income mobility. From “The Impacts of Neighborhoods on Intergenerational Mobility: Childhood Exposure Effects and County-Level Estimates” by Raj Chetty and Nathaniel Hendren:

The high housing prices that families often must pay to achieve better outcomes for their children may partially explain the persistence of poverty in large American cities. One approach to addressing this problem is to provide subsidized housing vouchers that enable families to move to better (e.g., lower-poverty) neighborhoods. In a companion paper (Chetty, Hendren, and Katz 2015), we show that the Moving to Opportunity experiment – which randomly assigned families subsidized Executive Summary, April 2015 housing vouchers to move to low poverty areas – significantly improved long-term outcomes for children who moved at young ages, providing direct support for such policies.

Of course, given limits to the scalability of policies that seek to move families, one must also find methods of improving neighborhood environments in areas that currently generate low levels of mobility. Our study does not directly identify which policies are most successful in achieving this goal, but our findings provide support for policies that reduce segregation and concentrated poverty in cities (e.g., affordable housing subsidies or changes in zoning laws) as well as efforts to improve public schools. The broader lesson of our analysis is that social mobility should be tackled at a local level by improving childhood environments. Much remains to be learned about the best ways to make such improvements. We hope the county-level data constructed here will ultimately offer new solutions to increase opportunities for disadvantaged youth throughout the United States

Anyway, here are a few other blog posts on housing policy, including the work of Moretti:

— That Financial Times study on US income inequality and housing totally misses the point

— Some smart thoughts on housing, jobs, and economic growth

— How government housing policy worsens inequality and harms economic growth

— Venture capitalist Sam Altman of Y Combinator on how to boost US innovation and growth