Intergenerational income mobility is a big topic now amongst economists, pundits, and public policy experts. Because it speaks to the ability of individuals to exit the socio-economic groups they are born into, it mirrors whether economic growth is egalitarian and whether opportunities for advancement are truly accessible to all regardless of their starting point.
Combine this with the fact that there is a well-agreed finding that income mobility in America has declined in the last decades (though the pace is debated) and one can easily understand why it is a big topic.
The diagnoses of the decline in income mobility have centered on two – somewhat interrelated – sets of the factors. The first is that the American economy has been subjected to important shocks since the 1970s: rising industrial automation, globalization, and the rise of China that caused changes in the types of industries that America has a comparative advantage in. All of these shocks displaced workers out of certain sectors and activities and they have since had a hard time finding work that puts them on a trajectory that is as good as the ones they had before. As a result, the opportunities they can give their children are more limited which explains part of the decline in income mobility.
The second point to consider is that income mobility heavily relies on social networks. The concept of “who one knows” highlights how being part of well-connected networks provides access to more information about opportunities for economic advancement. Being confined to areas with fewer opportunities means that one’s network delivers only information about lesser opportunities. This amplifies the initial shocks that hinder income mobility.
While these arguments hold true, they overlook a crucial aspect: places matter.
Mobility to regions with greater opportunities helps individuals mitigate the impacts of globalization or automation. For example, automation in the rust belt might contract manufacturing employment but it can increase demand for workers in the services industry (pushing up wages in that industry) in the sun belt. Thus, moving allows individuals to seize opportunities. Moving also opens doors to new social networks that offer better insights into available opportunities. Consequently, children from low-income families who relocate to high-opportunity areas with more robust social ties and networks tend to see significant long-term increases in income (especially relative to their parents).
This underscores the necessity of increasing housing supply in areas where opportunities abound. The problem is that the last few decades of housing policy in America has been mostly about reducing the ability of markets to increase the supply of housing. The proliferation of land use regulation encompassing zoning laws, building codes, density rules, environmental regulations, and other policies have essentially made it harder to increase the supply of housing. The result is higher housing costs.
In fact, because people still demand to go to places of great opportunities, the value of opportunities gets priced in the cost of housing (e.g., rents, price for houses). This increases the wealth of property owners in areas of high-opportunity who were already enjoying greater opportunities than those who wanted to move there. As such, not only are the disadvantaged locked out of opportunities but it also widens the gap between them and those who are not disadvantaged.
Moreover, land-use regulation also prevents lower-income individuals from accessing high-opportunity neighborhoods with better schools, healthcare facilities, and job opportunities. Because of the high cost of housing induced by strict land use-regulation, families are pushed into neighborhoods with lower-quality schools and fewer amenities (which is why the housing costs are lower there), further exacerbating disparities in educational and economic outcomes. Consequently, even those who manage to move closer to areas of opportunity often find themselves relegated to the lesser desirable parts of these regions. In essence, they end up paying a premium just to access the lower echelons of the most advantageous areas.
Imagine, for the sake of argument, a scenario of the deregulation of the housing industry to allow for more flexible use of space—such as adding new units, converting old ones, and promoting higher density and mixed uses (blending commercial and residential areas). Imagine that this scenario is the one that would have prevailed when all the adverse shocks on the income mobility discussed above started. People would have been motivated to move to higher opportunity areas and would not have been locked into places that were going through economic decline – something that would not have been reinforced by being simultaneously locked into a social network characterized by members who also have fewer and lesser opportunities for upward mobility.
How much of the decline in income mobility observed since the 1970s would we have reversed? Would there have even been a decline?
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