Building more homes solves productivity and in result solves for job inequality

The obvious effect of expensive housing – people having less money to spend on other things – is the one most people focus on. But it is only part of the story, because expensive housing makes people change their behaviour too – it affects where you live, what your job is, how big your family is and what your day-to-day life looks like too. And it’s these hidden effects that are the most important. As we’ve described above, better jobs drive up the price of housing when it’s difficult to build more. But that works both ways: when housing is scarce in high-productivity areas, some people are priced out of the area altogether, so they can’t move within range of better jobs. This means that many people are working in less productive jobs than they could if it was easier for them to move to more productive places. Their wages and productivity are lower and it’s harder for highly productive businesses to hire them. That means people who do get to live in these high-productivity places are less productive than they could be, because they are less able to combine their skills with the complementary skills of the people who have been priced out. As a result, many businesses end up leaving highly skilled staff without assistance, spending their time on work that could be done by others, lowering the time they can spend on the tasks they’re best at. This happens in people’s private lives too: people often spend hours trying to fix their leaky pipes instead of just calling in a plumber, because the prices of plumbers near them have risen to cover the costs for plumbers to live there. On average, workers in larger cities tend to be more productive than workers with similar skills and education in smaller cities. Sheer size is not all that matters, because complementarity between workers matters even more – a skilled software engineer will likely increase her income more by moving to Berlin (population: 4.4 million) than to Mexico City (population: 21 million). But there is strong empirical evidence that, other things being equal, bigger is better. This helps workers directly: people who moved from small to large cities in a study in Spain gained a wage premium when they did so, and accumulated better experience as time went by – and their experience persisted even if they moved away later, in the form of higher wages. In the United States, productivity per worker tends to rise by 2% or more with each doubling of city size. The link between size and productivity is only apparent when the city includes skilled, educated workers, which suggests the effect is mostly driven by the transfer of knowledge and division of labour among high-skilled workers. Metropolitan areas that are largely made up of unskilled workers do not become more productive as they get bigger. By historical and global standards, today’s most successful cities in America and other Western countries are astonishingly sparsely populated and sprawling. Haussmann’s Paris, Gaudi’s Barcelona, and the Georgian and Victorian areas of London are much more densely populated than nearly every square mile of the Bay Area and even most of the NYC metro area, other than Manhattan. The main cause of this is regulations that ban buildings that make better use of the land. Economists Gilles Duranton and Diego Puga judge that if New York allowed more of the sorts of densities that were more common historically, rents and house prices would fall towards construction costs, and the city would at least double in population, to over 40 million people. Similar things would happen to the Bay Area, Boston, Los Angeles, and other US ‘superstar’ cities if higher densities were allowed. This could mean those places looking more like central Paris or Barcelona, both of which are incredibly dense (and also happen to be very nice places to live). The total cost of this regulation-induced sprawl in the United States may be enormous. According to one study, if just three cities – New York City, San Jose and San Francisco – loosened their rules against building denser housing to the national average level of restrictiveness, millions would move to jobs that made the best use of their skills and total US GDP would be 8.9% higher. This would translate into average American wages being $8,775 higher per year. Others go even further. Duranton and Puga estimate that the average income gain from a housing regime that allowed easy building could be around 25%, or around $16,000 more per person per year. To put that in perspective, 9% is approximately how much the US economy contracted by in the second quarter of 2020, after Covid and lockdowns brought much of the US economy to a standstill. Sixteen thousand dollars per capita is the entire yearly income of people in Greece or Hungary. That’s a lot of money to leave lying on the sidewalk.