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How the housing markets in 5 U.S. cities may have cost you $5,000 in lost wages

Editor’s Note: In part two of a two-part series on the San Francisco housing market, special economics correspondent Duarte Geraldino spoke with Enrico Moretti, a professor of economics at UC Berkeley and a visiting scholar at the San Francisco Federal Reserve Bank. A labor economist who studies urban economics, Morretti is working on a series of research projects focusing on local labor markets and local housing markets in the U.S.

In a 2015 paper “Why Do Cities Matter? Local Growth and Aggregate Growth,” Moretti and Chang-Tai Hsieh, an economist at the University of Chicago, examined how the growth of U.S. cities affects national GDP. What they found was shocking — the housing markets in five U.S. cities prevented aggregate U.S. GDP from growing further, and in doing so may have cost the average American worker $5,000 in lost wages.

To understand how, read Duarte’s conversation with Morretti below, and tune in to tonight’s Making Sen$e report, which airs every Thursday on the PBS NewsHour. You can watch the first part of the series here. The following conversation has been edited for clarity and length.

— Kristen Doerer, Making Sen$e Editor

Duarte Geraldino: So what made you say, hey, labor and housing, there’s a link here that has national implications?

Enrico Moretti:  Well, one very striking feature of the U.S. labor market is that there are some cities in the U.S with extremely high productivity of labor. In these cities, places like San Francisco or San Jose or New York or Boston or Washington, D.C., workers are incredibly productive, and they earn very high salaries. Then there are other cities not too far from these cities where labor productivity is much lower and salaries are much lower. What’s striking about the situation is that more workers aren’t flowing from the low-wage cities to the high-wage cities. And part of the story has to do with the housing market. These cities that are blessed with high productivity of labor and high salaries tend to be very unwelcoming to new residents who want to relocate there. The city is very restrictive in the number of housing units that it allows, and so the city of San Francisco is limiting the number of American workers who can access its high productivity and its high salaries.

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Duarte Geraldino: So there’s a gate around the city?

Enrico Moretti: It’s as if there’s a gate around the city, and it’s not deliberate, but it’s de facto built by city policies that limit the amount of new housing units that can be built in the city and in the region.

Duarte Geraldino: So when you talk about these cities’ policies what exactly are you talking about?

Enrico Moretti: Well, there are a number of constraints. It’s very, very hard to buy an empty lot in San Francisco and build it. First of all, it takes years for developers to go from owning a lot to getting a permit. Second, there’s an endless series of appeals that delay this project. Anybody can stop a project for years, and the net result is that very few housing units get built in San Francisco relative to the demand, for the hunger for housing that exists in the area.

Duarte Geraldino: When you said that, you got me thinking about those wedding ceremonies when the priest asks, “Is there anyone who has any objection?” And in San Francisco, a thousand hands go up at once, is that right?

Enrico Moretti: That’s the San Francisco planning process, and sometimes it’s just one hand, but just one hand can block a project for months, years.

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Duarte Geraldino: And when a project is blocked, what’s the effect on productivity?

Enrico Moretti: Well there are two effects; one is local, and one is national. At the local level, the fact is that rents increase more than they should. This has been documented in a number of studies. And I think economists are fairly unanimous: If you have a strong local economy and you don’t add enough housing, your rents will increase much more than if you have a strong local economy and you add more housing.

Duarte Geraldino: And that’s the obvious effect?

Enrico Moretti: That’s the obvious effect. It’s just demand and supply, its Econ 1.

Duarte Geraldino: But there’s something else.

Enrico Moretti:  There’s an additional effect. There’s a loss for the entire nation, and the intuition for this loss is that you have these highly productive cities that are blessed with good, high paying jobs and extremely high productivity of labor. But these cities don’t allow American workers to flow to this high productivity and these good jobs. Through housing constraints, these cities — San Francisco, San Jose, New York, Boston and D.C. — are very unwelcoming to new residents. All these cities have in common extremely high productivity of labor, extremely high salaries, but also very restrictive housing policies.

Duarte Geraldino: And when you have that, we see that productivity is going to be decreased. So how much money is being lost because of these restrictive housing policies?

Enrico Moretti: A lot of money. In our work, we estimate what would happen if these high productivity cities were to have the same type of housing regulation as what we’ve observed in the median U.S cities. And we estimate that GDP in the U.S overall will increase significantly, and as a consequence, the earnings of the average worker will also increase significantly. Economic growth would pick up and workers would benefit to some extent.

Duarte Geraldino: How much money would the average American worker actually earn if these policies weren’t in place in these five cities?

Enrico Moretti: We estimate about $5,000 in additional earnings for the average worker.

Duarte Geraldino: $5,000 dollars for the average American worker in all the American territories if five American cities were to loosen their housing policies?

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Enrico Moretti:  Yes, if these five American cities were to lower the level of land use regulation to the level of the median American city, we would see increased economic growth, increased GDP and higher wages. And the effect would benefit workers not just in those cities but across the country.

Duarte Geraldino: Explain the link between a worker, say, in Nebraska — how would he or she benefit because a worker in San Francisco suddenly has a place to live? What’s that relationship?

Enrico Moretti: Well, let’s say that San Francisco was not as restrictive in its housing policy and would allow more workers to take advantage of the high productivity in San Francisco and the high wages. More people would relocate from different parts of the country to take advantage of this high productivity and these high wages. This would benefit those who move because they have better paying jobs. It would also benefit the people who live in the communities where the movers are from.

Duarte Geraldino: The ones who are left behind.

Enrico Moretti: Yes, the ones who are left behind will benefit, because there will be more available jobs in those communities than there is now.

Duarte Geraldino: And therefore their wages would go up, because they would take these higher paying jobs that were left by the people who then moved to San Francisco, New York, Washington or San Jose.

Enrico Moretti: That’s exactly right. So overall U.S. output will increase, the productivity of the average worker would increase and not surprisingly wages would also increase.

Duarte Geraldino: Why isn’t there a national effort to harmonize these five cities’ housing policies to make it easier for people to move to those cities and earn these higher wages?

Enrico Moretti: It’s not very easy politically. These cities are free to set the type of housing regulation they want. Every city in the U.S can decide how much new housing they want to build, and the voters of these cities, living in this lucky city with high productivity and high salaries, tend to be fairly averse to allowing a lot of new housing construction in their region.

Duarte Geraldino: Because essentially they are already members of the country club, right?

Enrico Moretti: Yes, they are already fine, and they don’t want other people to come and take a piece of it.

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