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ECON7110
1. Summary
⚫ The gap between Poor and affluent regions in the United States narrowed between 1880
and 1980, however, the rate of convergence reduced drastically after the 1980s.
⚫ Ganong and Shoag argue that the sharp increase of housing cost in high-wage regions
affects migration pattern, which slows the income convergence.
⚫ In the past, both of high-skill and low-skill workers migrated from low-wage areas to
high-wage regions, but after increasing the land use regulation, housing prices in high-
wage regions with more restrictions were pushed up, forcing low-skilled workers to leave.
⚫ High-wage workers are less sensitive to the higher housing prices, which results in a
trend: high-skilled workers are concentrated in states with high wages and costs, while
low-skilled workers redirect to in states with low wages and costs.
⚫ After the 1980s, the convergence rates are greater in the states with fewer restrictions on
housing supply.
⚫ The research provides a way for the policymakers to solve the inequality by increasing
the housing stock and hence eliminate impediments of migration.
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE– WANG 3
2. Background
Income inequality is a thorny problem that plagues many countries. The problem could be
caused by gender, age, occupation, social status, ethnic group and even workplace (Bowers
& Chand, 2018; Foster, Gonzalez, & Lopes, 2019). If some fundamental factors remained, the
economy would eventually reach its steady state (Cesaratto, 1999), although the period could
be lengthy (King & Rebelo, 1989). The theory indicates that the income gap among
economies with the same culture and policies would gradually diminish. While this was true
in US for over a century, the gap was widened again in recent years, with the bottom 20% of
the population can only get less than 4% of the total income (Levine, 2015). The percentage
of poverty has also increased (Sara & Amanda Paulson Staff Writers of The Christian Science,
2005).
From the research on the supply side of labour market, Ganong and Shoag propose that since
1980s, the convergence rate in US has been reduced significantly (2017), and the
phenomenon can be associated with a slowdown in population flows into high-wage areas.
They attribute it to the shortage of house supply and soaring housing prices caused by land
control, which impedes the free flow of low-skilled migrants, reducing the income
convergence. As more egalitarian societies are needed for poor people, higher inequality
would increase the support of income redistributive policies. However, the effectiveness of
wage policies is often undermined by ethnical diversity and inaccurate data collection
processes (Cook, McKenzie, Natalier, & Young, 2015; Foster et al., 2019). The findings may
provide another effective way for policy makers to reduce inequality by increasing housing
stock.
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE– WANG 4
3. Analysis A
This section will focus on analyze the parties affected by the events in chronological order,
because of the persistence of the impacts.
3.1. Land Regulations on High-Wage Regions
Since land use restrictions began to increase in the United States from 1965, housing
supply has become difficult to satisfy new immigrants, which has led to higher house
prices (Franks, 2018). Through the method introduced by Ganong and Shoag to measure
the regulation, the income convergence is weakened more seriously in regions with
tighter regulations (2017). The difference could be resulted by the influence on housing
price.
Figure1
Supply, S2
Supply, S1
Demand, D2
Demand, D1
Quantity of house
supply per year, Q
Housing
price, P
0
P2
P1
Q2Q1
Housing Price in high-wage
regions with more regulations
ECON7110 - SEMESTER 1 - 2019 - ANALYSIS OF AN ECONOMIC NEWSPAPER ARTICLE – WANG 5
Figure 2
The Figure 1 and 2 show that in high-wage regions, with strict and lenient land regulation
policies, increased immigration will lead to different outcomes in the distinguished regions.
In the region with more regulations, increase in the demand of house cannot be satisfied at
all, and due to the regulations of land, supply of house reduces, resulting in house prices to
soar, although more houses are traded. In contrast, in the regions with few regulations,
demand for new immigrants are met to some extent, although prices are risen slightly, and
the traded volume of houses rises drastically. The sharp rise in housing cost in high-wage
regions with more regulations also imposes great effects on workers and producers.
3.2. Housing Price on Workers and Producers
The exorbitant housing costs could lead to different consequens to high-skill workers and
low-skill workers, because the high-skill workers can earn much more money in high-
wage states, whereas the excess earnings for low-skill workers in high-wage states is
significantly lower, and the housing costs occupy larger ratio of their earnings.