Hsieh and Moretti on Allocations across Cities

Posted by {"login"=>"dvollrath", "email"=>"[email protected]", "display_name"=>"dvollrath", "first_name"=>"", "last_name"=>""} on July 13, 2014 · 3 mins read

Last post on the NBER growth session. Chang-Tai Hsieh (Chicago) and Enrico Moretti (Berkeley) presented a paper on wage dispersion across cities in the U.S. Wage dispersion (New Yorkers earn more than people in Cleveland) either represents compensation for living costs (housing in New York is more expensive than in Cleveland), a real difference in productivity (New Yorkers are more productive than Clevelanders), or some combination of the two.

What Chang and Enrico find is that the increase in wage dispersion across cities in the U.S. over the last thirty-ish years is due almost entirely to rising house prices in six cities: NY, DC, Boston, San Fran, San Jose, and Seattle. Wages have gone up rapidly in those cities, but that is basically just compensating their citizens for the higher costs of living.

Now, given the costs of living, the allocation of population across cities in the U.S. is efficient. That is, there is no reason for someone from Cleveland to move to New York on the margin. Their increased wage in New York only compenstates them for the higher housing cost, and so there is no change in their real wage.

However, if we do not take the costs of living as given, then the allocation of population is not efficient - there is a (surprise again!) misallocation. If there were not housing restrictions in NY and San Fran, and housing prices were not so ridiculously high, lots of people would move there because these are high-productivity cities. So one can back out the implied cost of housing restrictions across the whole U.S., and Chang and Enrico find that aggregate output is lower by about 10-14% because of them. That is, by preventing new housing in San Fran, restrictions drive up housing prices, which keep Clevelanders from moving, when in fact Clevelanders would be more productivite in San Fran.

The best part of the paper is the implied change in city sizes if you did remove restrictions. Chang and Enrico calculate that New York's population would rise by 890%(!!) without restrictions on housing.

As an aside, Ed Glaeser (Harvard) gave the discussion of this paper. It was my first exposure to Ed, and all I have to say is that he should do the last discussion of the day at every conference, everywhere. Just when you are checking your phone for messages and thinking about beer, he steps in and gives a great energetic talk that keeps your attention. And the bow tie. The man can actually pull off a bow tie.