Living in Big Cities: Higher Wages, Higher Housing Costs, According to Recent Research
In the past few decades, Americans have become less mobile, with a noticeable decline in the number of individuals moving each year. Figures from 1985 indicate that about 20% of the population moved annually, a figure that has dropped to less than 10% today [1].
One factor contributing to this trend is the preference of individuals with less formal education to stay in their current locations, even if it means missing out on job opportunities in larger metropolitan areas. It might seem counterintuitive for people to choose to avoid cities with more and often higher-paying jobs, but a recent study offers an explanation for this phenomenon [2].
Research conducted by Peter Ganong and Daniel Shoag in 2017 showed that migration from low-income states to high-income states had slowed down since 1980 [2]. The authors noted that, for much of the 20th century, many people moved from low-income states—often in the South—to higher-income states in the Midwest and Northeast because jobs in the North paid more, even after accounting for housing costs. Over time, this change narrowed the income gap between low- and high-income states.
However, since 1980, housing prices in places such as New York City and other big cities have risen faster than incomes. This effectively wiped out any wage advantage that people moving North may have enjoyed, particularly for lower-skilled workers who often paid a large portion of their income for housing. Consequently, fewer people moved to higher-paying Northern cities [2].
Interestingly, since the 1970s, more people have been moving from the North to the South due to lower housing costs, warmer weather, and lower taxes. This trend has continued, and it is one of the reasons why people are not moving as much as they used to [3].
A recent study by David Card, Jesse Rothstein, and Moises Yi sheds some light on this phenomenon. The research focuses on how location affects wages, as economists have long noticed that bigger cities generally have higher average wages. To explore this, the authors considered three possible explanations for higher wages in big cities:
- Sorting: High-skilled individuals with the potential to earn more money regardless of their location tend to cluster in big cities, increasing the average wage in these areas without necessarily being a result of the city itself.
- Industry Clustering: Certain high-paying industries, such as finance or technology, tend to concentrate in big cities. This concentrations leads to a larger share of high-wage industries, which in turn increases the average wage.
- City Effect: The city itself may be responsible for increasing workers' productivity, either through historical proximity to a port or geographical advantages such as access to oil or other resources.
The authors found evidence that firms in the same industry cluster together, with regional specialization leading to higher wages in large cities. However, they attributed most of the wage premium in big cities to sorting and better matching between firms and workers [2]. This means that workers with higher skills tend to live in large cities, which, in turn, allows firms to find the right talent for their needs.
When examining how housing costs and higher wages in big cities impact each other, the researchers found that when a commuting zone (such as a metropolitan area) grows by 10%, housing costs increase by 2%. At the same time, wages grow by only 0.4% due to regional clustering [2]. Since people typically spend about one-third of their income on housing, the authors concluded that wages would need to grow by roughly 0.7%—not 0.4%—to keep up with the increased housing costs and leave enough money for other expenses. This suggests that, on average, housing costs consume more than 100% of the higher earnings a typical worker would receive by moving to a more significant city [2].
In conclusion, while high housing costs in many parts of the country are not the only reason for the decline in interstate migration, they are playing a role. It does not make financial sense to leave family and friends and move to a new city with a higher-paying job if housing costs are going to offset the increased pay. To address this issue, it is essential to reduce housing costs in larger cities. Experts estimate that the U.S. has a housing shortage of at least 4.5 million units, with some estimates reaching as high as 20 million [3]. If we hope to return to the 1980s map, where most metropolitan areas were affordable, we need to build a lot more housing of different types in areas people want to live [3].
Many states have enacted reforms in recent years to make it easier to build housing, including California, Washington, and Florida. Studies show that these reforms—reducing minimum parking requirements, legalizing accessory dwelling units (ADUs), and simplifying permitting processes—resulted in more housing [3]. However, much more needs to be done to address the housing shortage nationwide.
In conclusion, while high housing costs in larger cities are contributing to the decline in interstate migration, it is within our power to correct this situation. With the right policy changes, we can improve access to higher-paying jobs and make it more affordable to live in these areas.
[1] Source: https://www.brookings.edu/early-warning/americas-great-migration-is-slowing-down/
[2] Source: https://www.econbrowser.com/archives/2022/04/15/the-high-cost-of-housing-and-the-decline-in-interstate-migration/
[3] Source: https://www.cbpp.org/research/housing/how-can-we-build-more-housing-and-make-housing-affordable-for-more-people
- The housing shortage in the United States, estimated to be at least 4.5 million units, is one of the reasons preventing individuals from moving to cities with better employment opportunities and higher wages.
- Zoning regulations and restrictions on housing development have been criticized for exacerbating the housing shortage, leading to higher housing costs and making it unaffordable for many individuals to move to cities with better job prospects.
- Cities with high employment opportunities and wages, such as New York City, have seen a significant increase in housing costs, making it challenging for lower-skilled workers to afford housing, and as a result, they opt to stay in their current locations rather than moving to cities with higher-paying jobs.
- The preference of individuals to stay in their locations, even if it means missing out on job opportunities, can be attributed to the high cost of living in cities with better employment opportunities, especially when considering housing expenses.
- To address the housing shortage and make it more affordable for individuals to move to cities with better employment opportunities and higher wages, regulatory reforms are necessary, such as reducing minimum parking requirements, legalizing accessory dwelling units, and simplifying permitting processes.
