Macroeconomics, Labor Economics, Economic Geography, Housing
Regulatory restrictions on housing supply have been rising in recent decades in the U.S. and have become a major determinant of house prices. What are the implications of the rise in regulation for aggregate productivity, and for wage and house price dispersion across metropolitan areas? To answer this question, I build a general equilibrium model with multiple locations, heterogeneous workers and endogenous regulation. Regulation is decided by voting: renters want less regulation and owners want more. In locations with faster exogenous productivity growth, labor supply and house prices also grow more rapidly. Homeowners in these places vote for stricter regulation, which raises prices further and leads to greater price dispersion. High-skilled workers, being less sensitive to housing costs, sort into productive places, which leads to larger wage dispersion. That is, wage and house price differences are amplified by regulation choices. To quantify this amplification effect, I calibrate the model to the U.S. economy and find that the rise in regulation accounts for 23% of the increase in wage dispersion and 85% of the increase in house price dispersion across metro areas from 1980 to 2007. I find that if regulation had not increased, more workers would live in productive areas and output would be 2% higher. I also show that policy interventions that weaken incentives of local governments to restrict supply could reduce wage and house price dispersion, and boost productivity.
The unemployment insurance system in the U.S. does not provide incentives to look for jobs outside local labor markets. In this paper I introduce relocation subsidies as a supplement to unemployment benefits, and study their effects on unemployment, productivity and welfare. I build a job search model with heterogeneous workers and multiple locations, in which migration is impeded by moving expenses, cross-location search frictions, borrowing constraints, and utility costs. I calibrate the model to the U.S. economy, and then introduce a subsidy that reimburses a part of the moving expenses to the unemployed and is financed by labor income taxes. During the Great Recession, a relocation subsidy that pays half of the moving expenses would lower unemployment rate by 0.36 percentage points (or 4.8%) and increase productivity by 1%. Importantly, the subsidies cost nothing to the taxpayer: the additional spending on the subsidies is offset by the reduction in spending on unemployment benefits. Unemployment insurance which combines unemployment benefits with relocation subsidies appears to be more effective than the insurance based on the benefits only.
managerial earnings (a move from the U.S. to Italy in our data), lead to a reduction in managerial quality of 27% and to a reduction in output of about 7% -- more than half of the observed gap between the U.S. and Italy. We find that cross-country variation in distortions accounts for about 42% of the cross-country variation in output per worker gap with the U.S.