Lack of Housing Affordability Impacts Economic Growth

According to the National Bureau of Economic Research’s (NBER’s) new working paper “Why Do Cities Matter? Local Growth and Aggregate Growth”, high-productivity markets are not the main contributors to economic growth due to limited housing affordability options.

Authors, Chang-Tai Hsieh and Enrico Moretti, found that high-productivity places like New York, San Francisco, and San Jose are not contributing to the GDP growth level in the U.S. as they should. Between 1964 and 2009, the level of labor productivity and demand grew rapidly in these three major cities due to capital-intensive dominant industries. During this 45-year period, the local economies grew 19.3 percent, but these cities only contributed to 6.1 percent of growth in the U.S. According to the study, most of the growth contribution stemmed from Southern cities and other urban areas.

"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," Hsieh and Moretti wrote. "Despite the large difference in local GDP growth between New York, San Jose, and San Francisco and the Rust Belt cities, both groups of cities had roughly the same contribution to aggregate output growth."

Moretti mentioned in the paper that the lack of housing opportunities prevent future employees from living in these larger market cities. The study also reviewed potential growth for these cities and found that “the dispersion of the conditional average nominal wage across U.S. cities doubled, indicating that worker productivity is increasingly different across cities.” The increased wage dispersion lowered aggregate U.S. GDP by 13.5 percent, a loss than can be attributed to the limited housing options in high productivity cities like New York, San Francisco, and San Jose.

The authors predict that by lowering regulatory constraints in these larger cities to the level of the median city, their work force could expand and potentially increase the GDP by 9.7 percent.

“More housing supply would allow more American workers to access the high productivity of these high TFP cities,” they wrote. “We also estimate that increasing regulations in the South would be costly for aggregate output and we estimate that increasing land use regulations in the South to the level of New York, San Francisco and San Jose would lower U.S. output by 3 percent.”

The authors conclude that gains in output and welfare from the relocation of labor are likely make a huge difference in the economic growth gap, and that the main cause of the limited housing supply in high wage cities is the lack of efficient spatial allocations in labor. Restraints like these limit the number of workers who have access to the most productive cities and this lowers income and welfare of all workers.