Economy & Business

Don’t Subsidize Low-Wage Cities

A vacant, boarded up house is seen in the once thriving Brush Park neighborhood in Detroit, Michigan. (Rebecca Cook/Reuters)
Instead, make highly productive cities cheaper places to live.

A new study by Harvard economists Benjamin Austin, Ed Glaeser, and Larry Summers, “Saving the Heartland: Place-Based Policies in 21st Century America,” laments that although wages are far higher in America’s most productive cities than they are elsewhere, Americans have become less likely to move to new regions with better economic opportunities. The authors fear that the country is “evolving into durable islands of wealth and poverty.” They recommend subsidizing low-wage geographies, through welfare spending and infrastructure investment, for example.

Unfortunately, their diagnosis ignores the likely role that low-skilled immigration plays in suppressing the wages of low-skilled workers. Nor do their prescriptions address the structural reasons why Americans don’t move to places where they could earn higher wages — high real-estate prices and cost of living in the most productive cities. In addition, their proposals would likely encourage further misallocations of labor to less productive geographies. A better solution relieves housing constraints in the most productive cities while reworking the immigration system to focus on higher-skilled workers.

America is undergoing profound economic shifts. “In 1969, Detroit residents had higher incomes than Boston residents, but today Boston residents are 40 percent wealthier,” note Glaeser and Summers. William Galston of the Wall Street Journal reports that “from 2010 to 2016, large cities generated 73% of the nation’s employment gains and two-thirds of its output growth. . . . From 2010 to 2014, just 20 counties accounted for half the new business formation in the entire U.S. . . . Skilled workers earn between two and three times as much in innovation centers as they do in less successful areas.”

Berkeley economist Enrico Moretti finds large spillover effects on the wages of lesser-skilled workers living nearby. He reports that “high school graduates living in Stamford, CT or San Jose, CA earn an hourly wage that is two times as large as workers living in Brownsville, TX or McAllen, TX with the same level of schooling.”

While wages have always been uneven, wages between the most and the least productive geographies in America had been converging until recently. “America has long tolerated dramatic economic differences across space, partially because people regularly moved from poor places to rich places and capital flowed freely from high wage areas to low wage areas,” argue Austin, Glaser, and Summers. But today, despite growing disparities in the wages of the least and the most productive geographies in America, blue-collar migration to productive blue-state cities has slowed and even reversed. The New York Times finds that “since 2000, the blue-born population in red states has grown by almost a quarter, to 11.5 million, or 12 percent of the states’ total population.”

Surely, exorbitantly high real-estate prices in America’s most productive areas and their cascading effects on the cost of living — including cramped living and long commute times — reduce the payoff for migrating to high-wage cities. The new study notes, for example, that “between 1977 and 2017, real housing prices in Detroit were flat, . . . while real housing prices in Boston increased by 165 percent and real housing prices in San Francisco increased by 285 percent.” Studies that account for the cost of living find that median incomes in low-wage states such as Oklahoma, Texas, and even Mississippi are comparable to those in high-cost states such as New York, California, and Massachusetts (although these studies cannot make neighborhood-specific adjustments to account for the fact that real-estate prices are lower in poorer neighborhoods). And a study by Chang-Tai Hsieh and Moretti concludes that real estate has become such a constraint to growth in high-wage cities that 2009’s GDP would have been 8.9 percent higher had we “chang[ed] the housing supply regulation only in New York, San Jose, and San Francisco to that in the median US City.”

While it’s clear that the success of high-skilled workers increases the demand for nearby low-skilled labor, this growth can manifest itself as higher employment or higher wages. Where the supply of low-skilled labor has been restricted — by the scarcity of real estate in high-wage cities, for example — growth has increased wages, although landlords have captured much of the gains. If automation, substitution of one good for another, or lower demand from higher prices restricts low-skilled wages, it doesn’t appear to be significant.

Low-skilled workers who are shut out of high-wage/high-cost cites are increasingly left to provide services to each other.

These shifting patterns of migration suggest that workers are self-sorting. Workers with the ability to adapt and thrive in high-wage cities migrate. The rest stay home or move away from these cities.

Low-skilled immigration is likely exacerbating this sorting. Low-skilled immigrants, chiefly Hispanic immigrants, have migrated to high-wage U.S. cities despite earning low wages after accounting for the high cost of urban living. An accumulation of low-skilled immigrants willing to accept lower cost-of-living-adjusted wages may be gradually reducing low-skilled migration to high-wage cities within the U.S.

With U.S. manufacturing employment — the chief source of “tradable” goods that low-skilled workers can produce and ship afar — having fallen to 8 percent of the U. S. workforce, low-skilled workers who are shut out of high-wage/high-cost cites are increasingly left to provide non-tradable services to each other. Without the benefit of the most productive workers pushing up demand for low-skilled labor, this surely reduces their wages and slows its growth.

No surprise, “these developments have reverberated through our politics. In the 2000 election, . . . George W. Bush carried 2,397 counties with 46% of our GDP. In 2016, . . . Donald Trump’s 2,584 counties accounted for only 36%,” concludes Galston.

Subsidizing low-wage geographies fails to address these problems. A better solution would be to shift our immigration policy toward high-skilled workers and relieve housing constraints in the most productive cities.

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