How Land Use Regulation Aggravates Income Inequality

This graph from the
This graph from the Shoag-Ganong study shows how states rank in two rankings of land use regulation: the Wharton Index of Regulation and the number of land use cases per capita. Regulation in Virginia, highlighted in red, was light-to-moderate compared to other states.

The thesis advanced by economists Daniel Shoag and Peter Ganong in their paper, “Why Has Personal Income Convergence in the U.S. Declined,” is not new. Market-oriented urbanists have made the same connections for years: that land use restrictions drive up the cost of housing, and that high housing costs aggravate income inequality by throttling the flow of lower-income households to wealthier regions offering greater economic opportunity. But Shoag and Ganong have tapped a new set of data to make that case more ironclad than ever.

The convergence of per capita incomes across U.S. states from 1880 to 1980 is “one of the most striking patterns in macroeconomics,” the authors state; for more than a century, incomes a rate of 1.8% per year. Then between 1990 to 2010, there was virtually no convergence at all. Prior to 1980, Americans were moving, on net, from poor places to richer places. Since then, higher-skill workers still have been moving but lower skill workers have tended to stay put.

Economic theory would suggest that in a free labor market, workers would tend to migrate to states and metropolitan regions offering better prospects for jobs and wages — as in fact occurred for more than a century. However, inter-state mobility has declined as housing prices have increased significantly more in high-income states than in low-income states, thus pricing lower-income workers out of expensive housing markets.

“Although skilled adults are still moving to high income locations, unskilled adults are actually weakly migrating away from these locations,” the authors find. “High housing prices in high nominal income areas have made these areas prohibitively costly for unskilled workers.”

Although the study was published in 2015, it has been getting increased exposure. Ganong presented the paper in a July Brookings Institute conference on municipal finance, and the Wall Street Journal highlighted the findings in an article today.

The driving force behind higher housing prices is land use regulation. Since 1977, they write, “it has been widely accepted that municipalities’ land use restrictions raise property values for incumbent homeowners. … Local variation in regulations is not randomly assigned; it is the product of substantial work by local governments and regulatory bodies.”

Hypothesizing that restrictive land use policies might explain the phenomenon, Shoag and Ganong devised a clever new measure — the frequency with which the phrase “land use” appeared in state appellate court cases over time. The number of land use court cases served as a proxy for the intensity of land use regulation in each state.

In conclusion:

A simple back of the envelope calculation … finds that cross-state convergence accounted for approximately 30% of the drop in hourly wage inequality from 1940 to 1980, and that had convergence continued apace through 2010, the increase in hourly wage inequality from 1980 to 2010 would have been approximately 10% smaller. The U.S. is increasingly characterized by segregation along economic dimensions, with limited access for most workers to America’s most productive cities and their amenities.

Bacon’s bottom line:

Shoag and Ganong have documented one of the major drivers of income inequality in the country, and it has nothing to do with globalization, automation, illegal immigration or tax breaks for the rich. Sadly, the phenomenon is totally absent from our debased media commentary and presidential debate.

If anything, the authors understate the role of high housing prices because their database makes it possible to compare states only. If we look at migration patterns within Virginia, for instance, we would see the same trends at work. Thousands of unemployed and underemployed workers in Southside and Southwest Virginia find are discouraged from seeking superior work opportunities in high-wage Northern Virginia by Virginia’s strictest land use controls and the highest cost of housing.

There are legitimate reasons for some land use controls. New development should be required to mitigate its environmental impacts, such as erosion and sediment control. A case also can be made for limiting development in order to preserve unique historical or cultural attributes. But land use restrictions are far more typically put into place to restrict growth, with the goal of holding down increases by dampening the demand for schools, roads and other public amenities. But most restrictions create unintended consequences, of which the lofty price of housing is just the most visible.

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5 responses to “How Land Use Regulation Aggravates Income Inequality”

  1. Larrytheg Avatar

    I think there would be a much more convincing argument beyond just some mostly ideological blather….if…

    1. – you specified the KINDS of land-use restrictions that are at the root of the problem.

    2. – you provided a list of cities that had differing land-use restrictions and demonstrated differences – between cities with differing land-use and ranked them in that manner.

    3. – you specified a model land-use approach to actually deal with the issue so that folks who really cared – beyond the ideological back and forth could advocate for. What exactly should be done? we don’t need no stinking ideology – we need simple and practical changes to advocate for.

    4. – obviously – labor is a supply/demand issue and one might think if housing was a cost associated with low level labor – that that cost would be reflected in the cost of labor… i.e. a cost of doing business.

    5. – someone might try to make the argument that rural folks can’t come work in the cities – but there is a ton of both legal and illegal immigrant labor more than willing to grab those jobs and do the work.

  2. Larrytheg Avatar

    is there an expectation among Conservatives and folks who “lean” libertarian that there is something government should be responsible with respect to income inequality? Can the folks who think that way demonstrate with some real life example somewhere on the face of the earth – a “better way” for govt to stay out of land use regulation and as a direct result – a better outcome for income inequality? Are there places in the world where govt works this way – letting the free market dictate land-use and as a result- income inequality is not the issue it is in this country?

    what role are folks like Jim B expecting of government? Do they want any developer to be able to build whatever the market is wanting – without interfering ? Are there places in the world -where this is the modus operandi and as a result -income inequality is much less of a problem?

  3. va011101 Avatar

    Interesting post, Jim, though I think the old “causality versus correlation” argument applies here. There are lots of nuances in land-use regulation. I agree with your point that many kinds of land-use regulations are tied to mitigating the public costs of expansive growth, but I would add that even in the most aggressive forms (proffers, development fees, etc.) fail to account for the long-term maintenance of the infrastructure.

    In terms of addressing regulations to encourage affordable housing, we should be looking at how to increase housing supply and transportation options connected to that housing within the existing land-use patterns. This often means lowering misguided regulatory barriers for things like accessory dwelling units and small-scale multi-family housing that can fit comfortably within a single-family context (think pre-WWII duplexes, quads, 8-unit and 12-unit buildings in the Fan.)

  4. Larrytheg Avatar

    housing requires infrastructure as Andrew points out. the scope and scale, density of housing is reliant on thing like water/sewer capacity, roads, schools, fire/rescue, etc as well as rights of ways for electricity, gas, cable, etc.

    correlation is not causation and yet it seems to be the favorite technique these days to “prove” something. Most of these “studies” are just plain laughable …

    finally – real estate folks and land-development folks operate on a phrase: – “best available use” for any given parcel of land.

    how does govt regulation affect that? seems to be that the supply/demand dynamic affects the “cost” significantly ….

    in this day and time of urban areas “shrinking” – you’d think that there would be ample vacant land opportunity for multi-family dwellings …. but “affordable” is not really reflective of reality for many workers…

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