The recent spotlight on homelessness and poverty in Baltimore, Los Angeles and other major cities highlights a growing challenge in urban America: the rising cost of living.
The economy is booming by nearly all accounts. Year-to-year real GDP growth has been at least 2 percent since President Trump was elected, the unemployment rate is at its lowest point since 1969 and year-to-year nominal wages are growing faster than they have since the 2008-09 Great Recession. But a handful of metropolitan areas are experiencing growing rates of homelessness and labor market exits.
For example, California’s population growth in 2018 was the slowest in recorded history. And, while the overall number of homeless people is at its lowest point since 2007, according to the latest statistics from the U.S. Department of Housing and Urban Development (HUD), the number of unsheltered people has grown from 175,399 in 2014 to 194,467 in 2018.
While many factors contribute to these recent trends, economists have reached a consensus that the primary driver behind increasing housing prices and rental rates is the presence of, and increase in, land use restrictions. Put simply, land use restrictions, or housing market regulations more generally, place restrictions on the types of structures that can be built — that either implicitly or explicitly raise the cost for developers.
For example, some restrictions may require buildings to only be of a certain height, whereas others may add additional permitting fees. In a large and seminal survey article in the Journal of Economic Perspectives, Harvard professor Edward Glaeser and University of Pennsylvania professor Joseph Gyourko summarized the evidence that these restrictions unambiguously reduce the supply of available housing and raise housing costs.
But these land use restrictions impose costs that extend far beyond housing. They also have effects on productivity, the allocation of resources across geographies and the labor market. In one of my recent working papers, I explore the labor market consequences of housing market regulation. Using data between 2000 and 2018 from the Census Bureau’s Quarterly Workforce Indicators (QWI), I found that increases in housing market regulation lead to significant declines in the rate at which new employees enter a labor market even after accounting for those who exit. This quantity, also known as “labor market dynamism,” is viewed as an important determinant of a labor market’s health because it measures how easily a geography can accommodate new workers and foster entrepreneurship.
My estimates of the effect of housing market regulation on labor market dynamism suggest that the increase in these regulations between 1990 and 2009 can account for between 12 and 24 percent of the overall decline in labor market dynamism over this period. According to University of Chicago professor Steve Davis and University of Maryland professor John Haltiwanger, labor market dynamism has been declining precipitously since 1990 – by about 10 percentage points – so the increasing stringency of land use restrictions may explain an economically important portion of these patterns.
While these restrictions are often used to help incumbent home owners or contain increasing rental costs, as articulated by recent New York lawmakers, they artificially constrain the supply of housing and adversely affect the area’s long-run health and economic competitiveness. For example, if these restrictions raise the cost of living, then companies will have to pay higher wages to their current and prospective future employees.
That’s exactly what we see in the data. Using information on the cost of living across metropolitan areas over time from the Bureau of Economic Analysis (BEA), my research shows that increases in the cost of housing are associated with an increase in the wages that companies pay, but only in metropolitan areas that rank high in terms of their land use restrictiveness.
In an effort to genuinely address the increasing cost of living arising from a shortage of available affordable housing, President Trump issued an executive order on June 25 to establish the White House Council on Eliminating Regulatory Barriers to Affordable Housing chaired by HUD Secretary Ben Carson. This council will investigate both qualitatively and quantitatively the effects of these regulatory barriers and identify ways of relaxing these constraints for affordable housing. Their recommendations will play an important role in promoting evidence-based policymaking.
One of the especially exciting features of this policy initiative is its bipartisanship. For example, Jason Furman, a former chair of President Obama’s Council of Economic Advisers, remarked in a 2015 speech to the Urban Institute that “excessive or unnecessary land use or zoning regulations have consequences that go beyond the housing market to impede mobility and thus contribute to rising inequality and declining productivity growth.”
Moreover, the Obama administration released in 2016 a “housing development toolkit” aimed at equipping state and local policymakers with the tools and knowledge to undertake some of these regulatory reforms. In this sense, both Republicans and Democrats alike should be willing to expand the supply of affordable housing by examining the adverse effects that land use restrictions play in shaping the incentives and constraints that developers face.
Talk is cheap. It’s easy for policymakers to rally behind more affordable housing and high-skilled jobs. But how we get there is the tough part. If policymakers really want to deal with the surging cost of living and increased social and economic challenge posed by technological change (i.e., automation), they need to reduce housing restrictions so that labor markets can efficiently allocate the demand and supply of skills. That way, we’ll have resilient and agile labor markets to manage technological change.
Christos A. Makridis serves as a digital fellow at the MIT Sloan Initiative on the Digital Economy, a non-resident fellow at the Harvard Kennedy School of Government Cyber Security Initiative, a non-resident fellow at the Baylor University Institute for Studies of Religion and a senior adviser to Gallup. Christos previously served as an economist on the White House Council of Economic Advisers.