A Bloomberg article by Virginia Postrel explores a discouraging trend in income inequality. For decades, incomes across states in the U.S. converged — i.e. poor states caught up to rich ones — just as Robert Solow‘s growth theory predicted:
Poor places are short on the capital that would make local labor more productive. Investors move capital to those poor places, hoping to capture some of the increased productivity as higher returns. Productivity gradually equalizes across the country, and wages follow. When capital can move freely, the poorer a place is to start with, the faster it grows.
That steady convergence, however, has stopped. One possible explanation? High housing prices in rich cities, caused by government regulation:
In a new working paper, [Daniel] Shoag and Peter Ganong, a doctoral student in economics at Harvard, offer an explanation: The key to convergence was never just mobile capital. It was also mobile labor. But the promise of a better life that once drew people of all backgrounds to rich places such as New York and California now applies only to an educated elite — because rich places have made housing prohibitively expensive.
The good news? There’s still room for less-educated workers in states that didn’t increase regulations — places like Nevada, Florida, and Texas. “Places that didn’t have this increase in regulation still have the old process that worked,” Shoag says in the article, “where people move to the richer areas, human capital levels converge, incomes converge — the whole chain that used to exist for the whole country is still true if you focus just on the areas that haven’t had as large an increase in regulation.”
(HT: Marginal Revolution)