Inequality and Housing Costs

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I have a little list in my head of things I wish academics would public serious research on, and this paper from Enrico Moretti was definitely on that list:

A large literature has documented a significant increase in the return to college over the past 30 years. This increase is typically measured using nominal wages. I show that from 1980 to 2000, college graduates have increasingly concentrated in metropolitan areas that are characterized by a high cost of housing. This implies that college graduates are increasingly exposed to a high cost of living and that the relative increase in their real wage may be smaller than the relative increase in their nominal wage. To measure the college premium in real terms, I deflate nominal wages using a new CPI that allows for changes in the cost of housing to vary across metropolitan areas and education groups. I find that half of the documented increase in the return to college between 1980 and 2000 disappears when I use real wages. This finding does not appear to be driven by differences in housing quality and is robust to a number of alternative specifications.

Moretti’s takeaway from this is that “the increase in well-being inequality between 1980 and 2000 is smaller than the increase in nominal wage inequality.” I’m a bit more interested in the implications for housing policy, as this seems to suggest that there’s substantial loss of welfare associated with regulatory limits on the creation of new housing supply in high-wage, high-cost metro areas. Allowing central cities and inner suburbs to become denser could substantially reduce the cost of housing in high-cost metros.

Among other things, doing this would allow more non-graduates to be able to afford to live in the high-wage metros that feature large concentrations of college graduates. Certain skillsets that don’t require college degrees are much more valuable if you practice them near where lots of college graduates live. Hairstylists, plumbers, auto mechanics, etc. can all command a higher wage if they have high-wage neighbors since you wind up with clients who can afford to pay top dollar for their services. That works much better, however, if you can afford to move somewhere where there are lots of high earners. And there would be many more such possibilities if we had some denser patterns of living and construction.