Why Has Regional Income Convergence in the U.S. Declined?

Source: Peter Ganong, Daniel Shoag, Harvard University – Harvard Kennedy School (HKS), January 2015, paper presented at the presented at the 5th Annual Municipal Finance Conference, 2016

For over a century, from 1880-1980, incomes in poorer areas of the United States rose faster than incomes in richer areas—a phenomenon known by economists as income “convergence.” During that time, the convergence rate across states was about 1.8 percent a year, but that rate has weakened over the past three decades. The rate was less than half the historical norm from 1990-2010, and in the period leading up to the Great Recession there was virtually no convergence at all. A new paper from Peter Ganong and Daniel Shoag suggests the decline can be partly attributed to reduced labor mobility resulting from higher housing prices in wealthy areas. When those prices increase, they deter the migration of unskilled workers to those areas. But when land use for local housing supply is less regulated, workers of all skill types will choose to move to more productive locations. This migration pushes down wages in productive areas, generating income convergence. The findings have important implications not only for the literature on land use and regional convergence, but also for the literature on inequality and segregation.