The lava shock and the benefits of moving house (who’s complacent?)

by on October 4, 2017 at 12:52 am in Data Source, Economics, Uncategorized | Permalink

This paper from last year somehow I neglected to blog, here is the abstract:

We exploit a volcanic “experiment” to study the costs and benefits of geographic mobility. We show that moving costs (broadly defined) are very large and labor therefore does not flow to locations where it earns the highest returns. In our experiment, a third of the houses in a town were covered by lava. People living in these houses where much more likely to move away permanently. For those younger than 25 years old who were induced to move, the “lava shock” dramatically raised lifetime earnings and education. Yet, the benefits of moving were very unequally distributed within the family: Those older than 25 (the parents) were made slightly worse off by the shock. The large gains from moving for the young are surprising in light of the fact that the town affected by our volcanic experiment was (and is) a relatively high income town. We interpret our findings as evidence of the importance of comparative advantage: the gains to moving may be very large for those badly matched to the location they happened to be born in, even if differences in average income are small.

That is from an NBER paper by Emi Nakamura, Jósef Sigurdsson, and Jón Steinsson.  There will someday be a Puerto Rican version of this study.

1 ohwilleke October 4, 2017 at 2:52 am

Presumably they are talking about a “natural experiment” but really, the language used in the abstract makes them sound like diabolical psychopathic mad scientists, and was very much in poor taste. It could have been worded much better and still conveyed their conclusions. Also, it isn’t clear if this really was a “natural experiment” or if it instead was some simulation or “psychology laboratory” although it doesn’t sound like it was.

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2 Sam the Sham October 4, 2017 at 6:25 am

I prefer to think the scientists chartered a helicopter to dump lava on a village.

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3 IVV October 4, 2017 at 3:58 pm

This paper was written by Drs. Egregious and Calamity from the University of the Secret Island Base.

However, I understand that most of the work was carried out by an enterprising graduate student named Volcano Boy. His thesis work is described by him as “development of the most diabolical traps since the Deccan,” and I recommend watching him closely; he has a great future ahead.

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4 Anon7 October 4, 2017 at 10:16 pm

The authors are posing as diabolical psychopathic scientists in an effort to gain more status (see Wednesday assorted links #6).

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5 So Much For Subtlety October 4, 2017 at 3:00 am

The Three Mile Island reactor incident killed a reasonable number of people. Not from radiation or the reactor’s problems but from the fear and stress of moving. Apparently it gives people cancer.

I suspect these people have not fully costed these moves.

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6 Ray Lopez October 4, 2017 at 11:02 am

Not sure if your analysis is precise SMFS. “These people” being who? The study says if you’re over 25, moving does not pay, under 25, it does. Also some theories of cancer say that excessive worry and stress causes hormones in your body to increase and ’cause cancer’ in certain individuals. Don’t worry, be happy, and you’ll die of a heart attack instead of cancer, like Tom Petty did, the ideal death.

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7 Nick L October 4, 2017 at 11:31 am

Not to mention, the authors seem to suggest that “moving costs” could be defined quite broadly, such that they include the various emotional and physical stresses of moving locations. The only numbers they can measure are: people who moved, and everybody’s earnings. In fact, maybe the people who moved and earned more would have still *preferred* to stay (with the benefit of foresight) if their home had not actually been destroyed. They may have considered that move very costly in other ways beside income.

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8 Hazel Meade October 4, 2017 at 12:03 pm

Did they really have to move? Or did they just move out of an irrational paranoia about radiation?

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9 TMC October 4, 2017 at 12:44 pm

From memory, no one was exposed to any more radiation than what you’d get from a cross country flight.

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10 John de Rivaz October 4, 2017 at 4:59 am

There seems to be a dilemma in that one the one hand governments seem to want mobility of labour, yet on the other hand they levy heavy taxation on moving. The legal work needed to sell one home and buy another is excessive, and often the fees attract “value” added or services taxes. There are similar taxes added to the cost of labour employed to move chattels. There are substantial taxes added to the money that is transferred on the exchange of houses.

Now it is known that if financial penalties are applied to motoring offences such as speeding or inappropriate parking, people are less inclined to do these things. Therefore why shouldn’t the financial penalties applied to moving home also make people less inclined to do it?

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11 Adam October 4, 2017 at 5:45 am

I agree. I wonder how much the U.K. Stamp Duty huts the economy by lowering labour mobility. It is a tax on buying a house changed as a percentage of the full value. I think it should be replaced with capital gains tax on the profit when selling. Probably with delayed payment if buying an other house.

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12 John de Rivaz October 4, 2017 at 6:29 am

The problems with capital taxes based on gains is that really they punish inflation. Delayed payment would get around this. But the taxpayer would probably then end up on state benefits because he couldn’t fund his retirement by trading down his house. This shows that house price inflation isn’t a great way of organising savings for retirement. It would be better for people to invest in stock market companies where the money is used to generate genuine wealth.

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13 dearieme October 4, 2017 at 6:53 am

“The problems with capital taxes based on gains is that really they punish inflation” They needn’t: it used to be that UK Capital Gains Tax was based on gains calculated after index-linking. This sensible system was replaced by Blair’s Labour government. Because.

The decision to exempt one’s Principal Private Residence from CGT – a foolish idea, in my view – was introduced by an earlier Labour government.

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14 John de Rivaz October 4, 2017 at 7:11 am

As to dearieme’s comment: The problem with discriminatory or “progressive” taxation is that the tax system should really be there to fund the duties of government, not as a tool of government. That is what is behind the “flat tax” arguments in the United States.

The UK’s Labour Party introduced capital taxation based on gains, and the high inflation of the 1960s and 70s showed it to be a brutal wealth tax affecting not just the wealthy, therefore they had to tone it down. In fact wealthy people could afford lawyers and accountants to mitigate it, or failing that they could afford to pay it without undue hardship. However a Labour voter who had been productive with just a little money and made a “gain” on some aspect of self employment, such as business premises, could face a life changing penalty. Inflation has been low so far this century, therefore the tax could be made simpler to administer.

15 Andrew M October 4, 2017 at 6:16 am

There’s a more detailed discussion of the paper here, with a link to a draft paper at the bottom:
https://afinetheorem.wordpress.com/2016/07/11/the-gift-of-moving-intergenerational-consequences-of-a-mobility-shock-e-nakamura-j-sigurdsson-j-steinsson-2016/

This isn’t just a theoretical lava shock: it’s an actual 1973 lava shock which destroyed a fishing village (pop:5200) in Iceland. This was a one-industry town: 69.7% of the jobs in the village were either in fishing or fish processing.

Overall it’s just a story of rural-urban migration. Anyone in the USA who moved from a small fishing village to a big city in 1973 would almost certainly be richer today than if they’d stayed behind.

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16 John de Rivaz October 4, 2017 at 6:23 am

It depends on how you define “richer”. In monetary terms, maybe. In health terms or overall happiness, who knows. Recall that people who are concentrated in cities often spend their two weeks of the year away on holiday by staying in the countryside or small maritime villages.

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17 Ryan Reynolds October 4, 2017 at 6:17 pm

+1

Absolutely – how much of this is effectively saying that those who didn’t move were getting that dollar value of non monetary benefits from staying put? I moved with my family to a different state, and I’ve got no babysitters, less access to my family, and countless other minor and uncosted penalties. But my wage is higher. I’m fully cognisant of what I’ve given up, but my accountant would only see positives.

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18 Ray Lopez October 4, 2017 at 11:04 am

Thanks for telling us what the country was in the study. Indeed, this could just be another statistic like rural-urban migration means young Farmer Fred makes more money than Old Farmer Fred in the Big City, re-packaged, but maybe that’s what the study is trying to show?

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19 ohwilleke October 4, 2017 at 4:13 pm

“it’s an actual 1973 lava shock which destroyed a fishing village (pop:5200) in Iceland. This was a one-industry town: 69.7% of the jobs in the village were either in fishing or fish processing.”

A sentence stating this in the abstract would have made the paper much more credible, not only because it clarifies that they aren’t diabolical mad scientists, but because something that happens in the economy of Iceland in a fishing village might very well not be generalizable. For example, a move within Iceland very likely isn’t nearly as socially disruptive as one from near Mt. Saint Helens. They may still go to the same major city for all of their big ticket services. Simply establishing that this is a first world country is also important context.

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20 JonFraz October 4, 2017 at 1:29 pm

What taxes are charged on moving in the US? I’ve moved short distances six times and long distances four times. There were the usual taxes on a rental truck to move my stuff but I’m not aware of any other special tax.

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21 Bernard Guerrero October 4, 2017 at 7:53 pm

NY’s real-estate transfer tax?

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22 JonFraz October 5, 2017 at 1:22 pm

How many us live in New York and are property owners there?

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23 rayward October 4, 2017 at 7:25 am

Many wealthy parents are moving their families to small towns to raise their children, even if it means one of the parents (usually the father) must be away several days a week for work, believing as they do that a small town has advantages over the city (including suburbs) for their children. I have a home in such a place (we have an airport that can accommodate aircraft of almost any size even though there are no commercial flights). I’ve been here long enough to see children grow up and go off to college and start careers, mostly elsewhere (the city), and to see children grow up and struggle with college and careers. I’m curious how these children are affected by their parents’ choice to raise them in a small town. What makes this especially interesting is that, this being a small town, children grow up with a wide assortment of friends, some from wealthy families and some not, some with highly ambitious parents and some not. While there is some sorting among the children based on these differences, it’s not always the case. What makes the difference between the children who do well (in the traditional sense) and the children who do not.

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24 Borjigid October 4, 2017 at 10:38 am

Lava shock is the definitely the best kind of shock.

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25 Ray Lopez October 4, 2017 at 11:05 am

Benny Lava might agree?

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26 Hazel Meade October 4, 2017 at 12:01 pm

Why wait? Do a Katrina version of the study.

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