Homelessness and the high cost of living – Christos Makridis

Christos Makridis, digital fellow at the MIT Sloan Initiative on the Digital Economy

From The Hill

The recent spotlight on homelessness and poverty in BaltimoreLos 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 productivitythe 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.

Read the full post at The Hill.

Christos A. Makridis is a digital fellow at the MIT Sloan Initiative on the Digital Economy

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