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Housing costs and occupational licensing requirements are stopping Americans from moving

Recently, I wrote about how the economic convergence between richer and poorer parts of America, which was such a fact of economic life in the past, had stopped. Why is this?

Rising housing costs

In a recent paper, economists Peter Ganong and Daniel W. Shoag note that the end of convergence coincided with a decline in population flows to high-income places. These changes, in turn, they observe “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.”

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. 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. 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.

In other words, the rise in housing prices in richer areas has slowed immigration to those areas which has put paid to further income convergence.

Occupational licensing requirements

Housing costs might not be the only factor. In another recent paper, economists Janna E. Johnson and Morris M. Kleiner from the University of Minnesota suggest that occupational licensing laws might bear some of the blame.

Occupational licenses, which cover 25% of the US workforce, act as barriers to entry into a labor market. Many licenses are assessed and issued at the state level, so even someone who is licensed in state A might not be licensed in state B. This makes it more difficult for that person to move from state A to state B, at least if they want to continue working in that occupation. Johnson and Kleiner argue that “If the rise in occupational licensing restricts interstate mobility, it potentially subjects a growing share of the labor force to barriers to mobility and subsequent wage growth”

In this study, we show that individuals in a variety of licensed occupations, ranging from high income and education professions to blue-collar trades, move across states at a significantly lower rate than others, although the size of this reduction varies substantially across occupations…We show that occupations with state-specific licensing requirements, such as exams, experience the largest reductions in interstate migration, whereas the interstate mobility of occupations requiring passage of a national exam for licensure is generally no lower than that of others. 

Johnson and Kleiner find that “Our results strongly suggest that state-specific requirements for occupational licensing limit the ability of individuals in affected occupations to move between states, but the interstate migration of licensed occupations with more nationally standardized requirements is not influenced by state licensure.” They argue that “These results suggest that reducing some of these restrictions has the potential to enhance labor market fluidity, increase the efficiency of the labor market, and raise the earnings of regulated workers.”

The decline of convergence and mobility are observed facts of recent American economic life. They show that a factor of production – labor – is not being allocated as efficiently as it could be, with harmful economic results. These papers point to ways we can begin to address this.

John Phelan is an economist at Center of the American Experiment. 

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