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The Great American Decoupling

July 21, 2012

Location, location, location–an emerging trend in the American labor market is the increasing pull cities have, particularly for high-skilled workers. As the cost of employing people in a city rises, you might think it would make more sense to relocate to a relatively inexpensive location to lower costs. Over time, incomes and productivity across the country would converge. But nowadays for companies that rely on creativity and networks, density matters more and more. You need access to deep pools of talent and capital. You need new ideas born in the crucible of a city’s churn.

We are starting to see more dynamic hubs decouple from the rest of country. Convergence becoming a thing of the past. Writing at Bloomberg, Virginia Postrel has a good piece on what this means and how housing policies have played a harmful role:

The key to convergence was never just mobile capital. It was also mobile labor. But the promise of a better life that once drew people of all backgrounds to rich places such as New York and California now applies only to an educated elite — because rich places have made housing prohibitively expensive. (Shoag and Ganong visualized these changes in a series of excellent animated graphics.)

The states with the highest incomes also used to have the fastest-growing populations, as Americans moved to the places where they could earn the most money. Over time, that movement narrowed geographic income differences. In 1940, per-capita income in Connecticut was more than four times that in Mississippi. By 1980, Connecticut was still much richer, but the difference was only 76 percent. In the two decades after World War II, Shoag and Ganong find, migration explains about a third of the convergence of average incomes across states.

But migration patterns changed after 1980. “Instead of moving to rich places, like San Francisco or New York or Boston, the population growth is happening in mid-range places like Phoenix or Florida,” Shoag says. Lower-skilled people, defined as those with less than 16 years of education, are actually moving away from high-income states…

As I have argued elsewhere, there are two competing models of successful American cities. One encourages a growing population, fosters a middle-class, family-centered lifestyle, and liberally permits new housing. It used to be the norm nationally, and it still predominates in the South and Southwest. The other favors long-term residents, attracts highly productive, work-driven people, focuses on aesthetic amenities, and makes it difficult to build. It prevails on the West Coast, in the Northeast and in picturesque cities such as Boulder, Colorado and Santa Fe, New Mexico. The first model spurs income convergence, the second spurs economic segregation. Both create cities that people find desirable to live in, but they attract different sorts of residents.

This segregation has social and political consequences, as it shapes perceptions — and misperceptions — of one’s fellow citizens and “normal” American life. It also has direct and indirect economic effects. “It’s a definite productivity loss,” Shoag says. “If there weren’t restrictions and you could build everywhere, it would be productive for people to move. You do make more as a waiter in LA than you do in Ohio. Preventing people from having that opportunity to move to these high-income places, making it so expensive to live there, is a loss.” That’s true not only for less-educated workers but for lower earners of all sorts, including the artists and writers who traditionally made places like New York, Los Angeles and Santa Fe cultural centers.

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