Why Has Regional Income Convergence in the U.S. Declined?

Abstract

The past thirty years have seen a dramatic decrease in the rate of income convergence across states and in population flows to wealthy places. These changes coincide with (1) an increase in housing prices in productive areas, (2) a divergence in the skill-specific real returns to living in productive places, (3) a redirection of low-skilled migration and (4) diminished human capital convergence due to migration. We develop a model where falling housing supply elasticity and endogenous labor mobility generates these patterns. Using a new panel measure of housing supply regulations, we demonstrate the importance of this channel. Income convergence continues in less-regulated places, while it has stopped in more-regulated places.

Keywords: Convergence, Regulation, Land Use, Migration, Housing Prices

JEL Classification: E24, J23, J24, R14, R23, R52