Why has regional income convergence in the U.S. declined?

1. “For over a century, incomes across states converged at a rate of 1.8% per year…The convergence rate from 1990 to 2010 was less than half the historic norm, and in the period leading up to the Great Recession there was virtually no convergence at all.”

2. After subtracting housing costs, janitors in NYC now earn less than they do in the Deep South.  This was not the case for most of American history.

3. For NYC janitors, housing costs measure at 52% of their income.

4. Income differences across states are increasingly capitalized into housing prices.

5. “…income convergence declined the most in areas with [land] supply constraints.”

6. “Had [cross-state] convergence continued apace through 2010…the increase in hourly wage inequality from 1980 to 2010 would have been 8% smaller.”

That is from a new NBER working paper, “Why has Regional Income Convergence in the US Declined?”, by Peter Ganong and Daniel W. Shoag.  Here are earlier ungated versions.

Note that this paper contains “…the first national panel measure of land use regulations in the US.”

Comments

Well, since the circa 1980, political economics has moved to the right-wing free lunch economics. Pay workers less to increase profits by increased scarcity and shifts to both cheap goods and services for the lower classes created by driving down incomes of the lower classes, who then produce the scarce expensive high profit goods that are bought by high income workers, and then fund consumption growth with ever increasing public debt, subsiding incomes to cut business labor costs of low income workers unable to get debt, aND increased consumer debt of the high income workers.

All the profits go to a small number who compete for assets inflating their costs, and driven to prevent new competing assets which would deflate asset prices destroying Wealth. Ideally the assets become scarcer by destruction. Stock share buybacks. And converting two to four small housing units to one much more costly unit, driving up housing unit prices.

And the traditional public policy responses of expanding markets with public transport are blocked to prevent taxing high economic profits, plus to limit competition that will drive down asset inflated prices destroying wealth.

These are free lunch policies because they reject zero sum, treating workers and consumers as totally independent, so worker costs can be driven toward zero while consumer spending grows exponentially, and capital gains exponentially inflating asset prices far above labor costs, defying entropy. The equivalent of perpetual motion mmachines.

Perhaps the dumbest first comment in ten plus years of reading this blog.

"Dumber" than 'First!': quite an accolade.

I'll be the First to say this: convergence comes and goes in cycles. For example, China, historically, vis-a-vis the West. There is little catchup internationally, using Maddison data going back to the 19th century and estimates even earlier, so that there's little intra-national convergence now is just part of this historical process. People don't like to move is the short answer; 'globalization' is not for the masses, but the elites like me, based on history. The mass of peasants (that would be you, reader and dearieme, most likely) never left a 50 km radius from where they were born, says French historian Fernand Braudel (French: ; 24 August 1902 – 27 November 1985) of the Annales School.

PS--For those of you that argue there is catchup, beware of the data period: if it's since WWII, that's why it seems there's catchup (South Korea and Japan being the most spectacular examples). I'm taking about going back centuries.

mulp is MR's version of the Famous Physicist Scott Alexander wrote about, I think:

http://slatestarcodex.com/2015/07/03/the-case-of-the-famous-physicist/

This putative psychiatrist Scott Alexander seems unsavory, blogging about his mental patients, and I hope he camouflages his writings with enough fiction and name changing to avoid breaching medical privacy laws. He's one step removed from being an anonymous nutter clamoring for public attention--wait, that's most people on this blog (save me)!

Maybe he can get away with it because no one he writes about wants to call him on it and be identified publicly as the crazy guy who thinks he's "solved physics."

"(this would be a good time to reiterate that every patient story I tell here is a composite of multiple different people with all of the details changed around to protect anonymity. The gist of the story points out a true thing, but the specifics are all twisted around so thoroughly that even the people involved couldn’t recognize themselves.)"

Ray is just going for obvious trolling now, along with Thiago/Thomas. Give it a rest you two.

@Ray:

Scott Alexamder doesn't even try to stay anonymous:

Announces girlfriend's travel blog here:

http://slatestarcodex.com/2017/07/17/ot80-opec-thread/

She shows his picture here:

https://worldlypositions.tumblr.com/post/162580243354/westland-to-chicago

Would you care to share something with a li'l bit more insight or intellienge, to say something of knowledge, experience or expertise? Try not to hurt yourself. 😉

"low income workers unable to get debt"
Not a problem.

Just wow.

Oh and I thought it had more to do with the slow growth planned communities movement. Ideas like putting rules in place that "retain the charter of our area".

IF you first subtract housing costs THEN janitors in NYC make less than janitors in the deep South. Looks like a setup to me. Couldn't prove the point with raw data so like the AGW scam you adjust the data until it supports your preconclusions. Print the actual amount that school janitors make in NYC and I bet most people would be surprised at how much that they are paid.

"expanding markets with public transport are blocked ... These are free lunch policies"

If expanding public transport is a free-lunch policy, I have a Second Avenue Subway to sell you.

He is saying blocking the expanding of punlic transport is a free lunch policy because, he says, "they reject zero sum, treating workers and consumers as totally independent, so worker costs can be driven toward zero while consumer spending grows exponentially, and capital gains exponentially inflating asset prices far above labor costs, defying entropy".

Great impression of a numerate person, ghost of Theodore Adorno lurking around Tyler Cowen's blog!

"2. After subtracting housing costs, janitors in NYC now earn less than they do in the Deep South. This was not the case for most of American history." (...)

"4. Income differences across states are increasingly capitalized into housing prices."

This does not mean that the income convergence, in real terms, was already achieved?

"4. Income differences across states are increasingly capitalized into housing prices."

Sure, the rentiers know what prices the market can bear, not only in housing but in commercial property as well.

http://www.ocregister.com/2017/07/25/1827-per-month-apartment-rents-continue-7-year-climb/

"the rentiers know": I've seen that misunderstanding of what "rentier" means in Britain too. Mainly among the Guardian-reading classes.

Merriam-Webster:
Definition of rentier

: a person who lives on income from property or securities

That is what America has become. The rich gets richer and the poor gets poorer.

"Our children will not know it's a different country.

All we can hope to leave them now is money."

"and the poor gets poorer."

Not true. Didn't you read #2? If they have any smarts, they move.

How many millions of impoverished workers will the Deep South take before local workers lose even the meager bargain power they have right now?

"How many millions of impoverished workers will the Deep South "

If you are going to pretend to be Brazilian you should pretend to be aware that those "impoverished workers" have a higher standard of living than the equivalent Brazilian workers.

Well no, his schtick is to pretend he's Brazilian and also to pretend Brazil is a much better place than it actually is. What makes this cat so interesting is it's hard to tell if he knows he's a clown. Ray Lopez knows, he's just lonely out there, Thiago/Thomas I'm not so sure.

Do they? Brazilian workers can count on a single payer healthcare and the most generous work legislation.
Brazil's Mathematics Olympics team ranked higher than Norway's, Finalnd's and Sweden's (yet, you never saw me bragging about it). President Temer's economic reforms have beoken the inflarion's back and lowered interest rates and the unemployment rate. Brazilians do not fear their friends, relarives, colleagues, fellow church-goers and street-walkers. People don't get mad because they did not get that promotion than kill their friends, fsmilupy and innocent passerby. Mental disease and suicide are rare. Happiness polls put Brazil among the highest-ranking countries. Water is cheap and Brazilians are the people which takes more bathes per day. America's government is hopelessly grindlocked, President Temer is making the boldest reforms since Gorbachev. America is bitterly divided, Brazil is unified under President Temer. Americans hate one another, one of our anthems says

"We cannot believe that in another age

Slaves there were in so noble a country.

Now the rosey glow of dawn
greets brothers, and not hostile tyrants.

We are all equal! In the future, united,

We will know how to take up

Our august banner that, pure,
glows triumphant from the altar of the fatherland!"

Brazil's music and food are the world's best. American songs are noise and American food is homogenized swill.

"Do they?"

LOL, yes, it's not even particularly close. For that matter Brazilian unemployment is 13%. The Brazilian economy is not doing well. Brazilian median standards of living are close to poverty level in the US.

All that's rather obvious. I'm sure Brazil is, in many ways, a great place to live. I'm sure most Brazilians are nice people and they enjoy their life. However, it's clear that the average person in the US is materially better than the average person in Brazil.

Not when one accounts for free healthcare, cheap water, better food and free university education for the top performers. Brazilians don't mutter about fearing their neighbours, teachers, students, wives, etc. Suicide is rare innBrazil, so is mental disease.

This exactly. People are just automatons and shouldn't aspire to community or even humanity, really. It's disgusting they feel entitled to either.

Indeed, if they had any brains, they would get themselves to rural Mississippi so they'd only have to spend 30% of the money they get cleaning toilets on their rents.

This just confirms what we already know: in the past workers moved from low pay states to high pay states, but today workers are moving from high pay states to low pay states, lower housing costs in the low pay states being one of the incentives.

Preach ray, preach !

Never in history did large numbers of people move from areas where land was scarce to areas where land was cheap and plentiful. It's not like countries exist made from their descendants ! Oh, no!

And if they do then good riddance! I'm sure their countries will be failures! How could society exist without the rentiers and the upper crust of society? A nation of convicts maybe, or religious outcasts.

Trash

Speaking of housing, the housing boom in my area in the run-up to the financial crisis was nothing compared to the housing boom today. And I suspect that a big reason for it is Airbnb: many if not most of the houses being purchased in my area are second homes (there isn't much in the way of industry in my area other than real estate), the ability to rent short-term a huge incentive to purchase a house in my area. While fueling the housing boom, this has had a devastating impact on long-term rentals (there are few available now due to the advantage to the owner of short-term rentals). Yesterday I met with several young and successful (and very attractive) real estate brokers/developers, who have little if any memory of the last financial crisis. Unfortunately, I can't forget it. Ah, the advantage of youth.

Really? It's that much more beneficial to rent short term then long term? Even after factoring in the added headache and/or expense of cleaning between arrivals, the risk of bedbugs, etc.? I'd very much like to see some data on that

rayward: "Yesterday I met with several young and successful (and very attractive) real estate brokers/developers, who have little if any memory of the last financial crisis"- so they have been working less than ten years, and have hard bodies? So they are roughly under 30 years old, good at sales, but seemingly ignorant of the financial crisis despite being putative real estate brokers? Hmmm.... assuming you're hetero, they are cute girls, and it sounds like women pretending to be (or actually are) bimbos for marketing purposes. Girls that look 'easy' sometimes make more sales, especially to an older male like you. In front of other women these sales girls would switch gears and assume another role (women are good at doing that).

Troll troll troll your boat, gently down the stream....

Ray is no troll. He's clearly educated and when he cares to, offers interesting information and articles. He has a shtick to make us laugh, which is obviously at most 20% true. But he's no troll. He's either a bored upper middle class professional, or a wealthy layabout who brags on the internet. Welcome to 2017. He's also OUR Ray.

Art Deco is not a troll either. He's a conservative catholic whose grouchiness and pugnacity make him a target for 20 year olds to sock puppet. But I do think he's treated unfairly.

Ray is a troll. A good natured one, but he's obviously posting to get reactions with his baloney. I love that guy.

Art is no troll, he's a humorless hypocrite. He's not treated unfairly so much as treated as expected. If he lightened up even a little, and had even a shred of respect for those who disagree with him, he'd get way less grief.

make him a target for 20 year olds to sock puppet. But I do think he’s treated unfairly.

The sock-puppeteer hasn't been 20 years old in some time. Had he been in my time on these boards, he'd have graduated from GMU some years ago.

Thanks, Ray, for assuming I might try to seduce some young pretty thing. I was actually meeting with them to help a friend who is selling her house. One of the young women is married to a developer/builder who is building and selling new houses as fast as he can. He too is young and doesn't have much of a memory for what happened to those in his position now who preceded him and lost everything in the crisis. I've been through so many real estate booms and busts I can't count them all. And stock booms and busts too. I recall during the tech bubble young investors tapping into their credit cards to invest in the bubble. Young and enthusiastic investors today say this time it's different, with a president who understands business. Good luck with that.

Ray Lopez, putative Lothario.

there isn’t much in the way of industry in my area other than real estate.
Like the hippie commune where they all made candles and sold them to each other

Living in high cost areas is a form of consumption. Subtracting the entire thing makes no sense.

"After subtracting yoga classes, Whole Foods purchases, and rent costs, the average hipster in Williamsburg is poorer than Hank Hill's family !"

Are Dominican cleaning ladies going to Yoga classes and shopping at Whole Foods?

No, they are living many to an apartment and eating beans.

The hipsters in Williamsburg don't work as janitors and their rent is subsidized by their parents.

Part of the consumption function is being able to shit on yokels from the "flyover" states. Perhaps the janitors are engaging in this too. "I clean the toilets used by the movers and shakers of the Free World. What do YOU do?" (spoken in Spanish, of course).

This is almost certainly true.

People are willing to pay to be in "better" zip codes even if they don't use the public schools or other zip code based amenities.

Look at all the scorn heaped on the "bridge and tunnels" folk in NYC. Living in Manhattan is like buying the authentic Coach bag. It gives you something to be snobby about.

Maybe he likes yoga classes more than Hank Hill’s family likes propane, then he is still ahead.

“After subtracting yoga classes, Whole Foods purchases, and rent costs, the average hipster in Williamsburg is poorer than Hank Hill’s family !”

Hank Hill was a salesman married to a schoolteacher and they only had two children in residence. That's likely and above-the-median household in terms of personal income per resident.

Sure its a form of consumption. The question is: is the consumption any different from the same consumption done in the south at a fraction of the price.

Its customary to weight real income or purchases in different years based on inflation, while not quite the same as weighting "real" income in different areas, a case can be made to do so

Yes it is obviously different. Because the price is different. Otherwise you're allowing for arbitrage opportunities.

This is still an economics blog, right?

People LIKE to live in NYC and are willing to pay a massive premium to live there. Most of these people are professionals trying to win in a tournament economy. It's the ticket to play. Most of them lose. And janitors prefer to live there for cultural and opportunity reasons. However, people need to understand that equilibrium is the long term trend and not a steady state. Poor people living there does not disprove the trend, because transaction costs and time.

Also, the cultural cache is worth a lot in rent for some. "I live in ny" is worth more to many than "I met my husband in Houston". The next question would be "do people actually live there ?" Unironically.

There have to be people on this blog cued in to the reality of upper middle class America. imagine if your daughter marries a man from Oklahoma or Arkansas. And wants to move back there. It's akin to someone saying they're moving with their husband to a leper colony.

Sure but the reverse is true too...if an Oklahoma daughter marries some investment banker and moves to Manhattan, that's a big cultural shift too. Same as it ever was.

If income converged at 1.8% per year for a century, how much possible convergence can there be left? (1.018^100 = 5.95)

this is a correct analysis only if the set of low income states and set of high income states remained stable through the century.

Tell me more. How does changing the sets of states affect the idea that a disparity that has been reduced to a sixth of its level of a century ago perhaps has no further reduction available?

Globally tight money is diminishing the Baumol effect.

So is the world's oldest professional prostitution or debt finance? Or is this just scientific proof they are the same?

Yet another example of market failure. ;-)

People (or at least young lawyers) are starting to catch on. Houston BigLaw matched NY BigLaw in 1999 but it wasn't until maybe 5 years ago that a young couple (weird how most of our young lawyers are married to young lawyers these days - very rare 30 years ago) in the NY office asked to move to Houston after seeing how wildly far (I still can hardly believe we pay it) two combined base $165,000+ incomes go in Houston. They also see the real benefit and that is they can pay off all student loan debts and start having kids before they're 30. I'm starting to think that NY and SF are in some ways just very elaborate eugenics programs.

" (weird how most of our young lawyers are married to young lawyers these days – very rare 30 years ago) "

Hmmm.. reference Charles Murray's "Coming Apart"

So what, keeping women out of the professions is keeping America together? More likely lawyer boys married nice girls from wealthy families who didn't earn any market labour, rather than some kind of cross-class marriage to a female mechanic.

Clearly you haven't read the book.

" rather than some kind of cross-class marriage to a female mechanic."

The book's supposition is that previously most smart people tended to return and marry into their community or close to it. So, the smart lawyer boy married his high school sweetheart and they had kids and lived close to where they grew up. They might have been American "upper class", but they lived 3 streets over from the janitor that cleaned his office. And their kids went to the same elementary school as the janitors kids, and their wives shopped at the same grocery store and he and the janitor shopped at the same hardware store.

Now, the current system tends to have the smart boys and girls meet in college, pair off and move to an area full of a very similar demographic. Their kids go to private schools, they get their groceries from Whole Foods and they wouldn't dream of shopping at Walmart, where the lower class shops.

The point of the book is that we see a class separation developing in America (though it's a meritocratic upper class) that's been fairly rare in our countries history.

That's not the important class separation. The big one is between those that can pass a background check and those that can't. If an individual fails to pass a background check for whatever reason they know that they'll never be able to pass one. Similar to the "no-fly" list. This will eliminate their opportunity to get a real job, finance a house, rent an apartment, etc. These background check failures will still need to eat, wear clothing and have a place to sleep out of the rain. Ergo businesses will spring up, and, in fact, already have, to supply their needs and provide them with employment. This caste will be the American version of the Indian "untouchables".

"Charles Murray is racist, sexist, and homophobic, and I will argue against any point Charles Murray has ever made!"

Yeah my wife and I (two professionals making around that income range) the other day were calculating how much more we would need to be paid to live in NYC instead of our Sun Belt city (we both have had opportunities there). They would have to pay us at least double and though we might be more productive there is no way we would be twice as productive.

In most cases pay is just not that much higher in the high cost areas relative to real estate cost.

Anecdotal, but my experience is the opposite. I'm a sub-40s professional, white collar but not super-high-pay, married to same, and we LEFT Houston (where we lived inside the Loop and were enjoying the urban life) to purse a job opportunity on the East Coast. Everything here is more expensive--we now live in a smaller apartment that we don't own, rather than a house that we owned, we lost access to free childcare because our families are in Texas, so we had to pay out the nose when we had our first child, we have to pay high city taxes, my car got side-swiped because of on-street parking, etc.

But we love it. The weather is better. I get to ride my bike to work--I was close enough in H-town, but the heat and humidity made it impractical--and there is more public stuff to do. It feels like a whole different lifestyle. And many (most?) of the friends we have made here are similarly transplants from Texas, Florida, Georgia, and other non-East-Coast locales. Most of us plan to stay, and lots of us are having children.

One important caveat is that we live in Philly, which I think is the cheapest of the cities in this zone (and maybe not East Coast, precisely? I'm from Texas, so these distinctions are a little lost on me), so maybe Boston or whatever would be a different story.

Houston is HOT. I can't deny it. Today was awful. And yet, there's a reason why, in Beaumont and in Houston, museums of early Texas settlers have A/C displays among the first exhibits encountered. Can you imagine living down here, amongst the mosquitos (and roaches the length of a golf ball's diameter) without A/C? I can't.

A couple of decades ago it was said Houston was the most air conditioned city in the world, which made sense. But with the rise of the emerging world it might now be Singapore or Hong Kong.

So that guy was right all along---the rent is too damn high.

His analysis is correct, his "fix" would have been a disaster.

It's almost as if our economic policies focus more boosting asset prices than increasing income.

Straussian = tongue-in-cheek?

Why has regional income convergence in the U.S. declined?

Perhaps because there are benefits to living in Mississippi that are not captured in income statistics, and these are more salient for decision-making now that Mississippi incomes are 70% of national means rather than 40% of national means (which was the situation in 1929)?

Low taxes and right-to-work. It's better to be mid-tier in Red State America than Blue State America.

Why do working class people live in these HCOL areas? The janitors are mostly immigrants who don't have regional ties to the area. Why don't they pick up and leave? Or are they so fresh off the boat that they don't know better? Maybe this is why the coastal elites want to increase immigration from God forsaken countries; they're easier to exploit.

"The janitors are mostly immigrants who don’t have regional ties to the area. Why don’t they pick up and leave? Or are they so fresh off the boat that they don’t know better? "

Janitorial work, landscaping and basic construction are all entry low skilled work. So, for the last 30 years there has been a continuous fresh crop of new immigrants to fill the vacuum. Now, with the drastic drop in illegals, the fresh crop will largely be limited to legal immigrants. So, there might be some adjustments due to a drop in the low skilled labor supply.

Family ties, local culture. If you don't fear the Protestant Bible there's little to do in some of those LCOL states.

+1

Does the text string "migra" appear in this article?

If not, why not?

I wonder if these findings are robust if one controls for the effects of the Federal Employees Pay Comparability Act of 1990 (FEPCA) and regional differences in federal employment of lawyers. Theoretically 5 U.S.C. 5104 (15) provides that individuals employed at the top-of-the pay scale GS-15 level perform work of the following nature:

Grade GS–15 includes those classes of positions the duties of which are—
(A) to perform, under general administrative direction, with very wide latitude for the exercise of independent judgment, work of outstanding difficulty and responsibility along special technical, supervisory, or administrative lines which has demonstrated leadership and exceptional attainments;
(B) to serve as head of a major organization within a bureau involving work of comparable level;
(C) to plan and direct or to plan and execute specialized programs of marked difficulty, responsibility, and national significance, along professional, scientific, technical, administrative, fiscal, or other lines, requiring extended training and experience which has demonstrated leadership and unusual attainments in professional, scientific, or technical research, practice, or administration, or in administrative, fiscal, or other specialized activities; or
(D) to perform consulting or other professional, scientific, technical, administrative, fiscal, or other specialized work of equal importance, difficulty, and responsibility, and requiring comparable qualifications.

So of course New York state alone has 255 GS-15 federal lawyers compared to 218 total in the 5 "Deep South" states (AL, AR, GA, MS, SC) used in the study and those 255 get substantially higher locality pay. Overall federal lawyer employment in New York alone is 1,736 compared to 1,628 for the allegedly less-productive "Deep South." All figures from OPM's FEDSCOPE site using March 2017 data for the GS-0905 occupation. The federal pay "comparability" system, that loathsome canard, that most wretched of public policy abuses, is simply the foot of oppressive tyrants of the Upper East Coast Brahman caste firmly crushing the neck of decent working class Americans. To the barricades brothers!

At one time, it made sense for unskilled workers to move because they could go to places where greater capital investment would make them more productive. Think of people moving from the south to Detroit in the first half of the 20th century. There were high-productivity factories looking to employ masses of unskilled workers who then produced far more value per hour in a Detroit auto plant than they had on a farm in Kentucky. But that logic doesn't apply to janitors. Janitors in NYC and San Francisco don't get any more cleaning done per hour than in Birmingham Alabama. Given urban congestion and sclerotic union work rules, the reverse is probably true. The only recent example I can come up with for low-skilled workers in the U.S. moving to places where their productivity is higher is all the workers who piled into North Dakota and elsewhere to work on oil rigs. But that's a rare exception.

There's nothing low-skilled about oil-field trash.

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"Janitors in NYC and San Francisco don’t get any more cleaning done per hour than in Birmingham Alabama."

Imagine someone visiting a Sand Hill Road VC considering a business deal that could launch the next billion-dollar business. The toilets are disgusting, and that is the straw that breaks the camel's back of the deal.

Versus selling a few chips at the Golden Flake company in Birmingham...

So why are real wages for janitors higher in the South than in the SF Bay Area? Why aren't the VCs and techies willing to pay even better wages to get the best janitors instead of letting the leave for the South?

You don't need toilets in San Francisco. The entire downtown is one giant public toilet. Have you ever walked down Market Street?

“2. After subtracting housing costs, janitors in NYC now earn less than they do in the Deep South. This was not the case for most of American history.”

So living in NYC is a luxury good then? Right? Right!

As the problem is related to housing cost, we need to observe how housing costs are related to zoning and NIMBY politics. By preventing people from building up or rebuilding existing areas, the house prices become very inelastic and you have 1.3 million dollar 1,200 ft2 houses in the SF Bay area with a very small % increase in population.

This "vetocracy" evoltion where everyone has a veto and NIMBYism and the regulatory state (zoning and planners) preventing any "change" has made the housing system unstable and unaffordable.

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