The economies of American states and cities are diverging

Boosting labour mobility may help

“THE CONVERGENCE of income across regions in the United States is a robust fact.” So wrote Olivier Blanchard, until recently the chief economist of the International Monetary Fund, in 1991. At the time he was right. During much of the 20th century, poor states and regions in America caught up with rich ones at a rate of about 2% per year, a figure sometimes called the “iron law of convergence”. In 1930, for example, workers in Mississippi earned just 20% of the wages of workers in New York. By 1980, the proportion had increased to 65%.

But in the years since Mr Blanchard’s pronouncement, such convergence has slowed. A paper by Peter Ganong of the University of Chicago and Daniel Shoag of Harvard finds that incomes across states converged at a rate of 1.8% per year from 1880 to 1980. Since then, however, there has been hardly any convergence at all. A study by Elisa Giannone of Princeton finds that convergence has declined in cities too. Between 1940 and 1980, poor cities caught up with rich ones at a rate of 1.4% a year. Since then, they have lagged behind.

As income gaps have stopped narrowing, differences in regional labour markets have emerged. A recent paper by Alison Weingarden of the Federal Reserve Board estimates that since 2007 the gap between the labour-force participation rate of “prime-age” workers aged 25 to 54 in big cities and similar workers in rural areas has grown from 1 to 3.8 percentage points. Since 2015, the difference between the unemployment rate of prime age city-dwellers and their rural counterparts has increased from 0.3 to 1.2 percentage points (see charts).

What is causing this economic divide? One theory says that restrictive housing regulations have caused property prices to rise in rich cities like San Francisco, discouraging low-skill workers from relocating to such places. Another argues that new technologies have boosted the productivity and wages of skilled labour. Such “skill-biased” technological change has widened existing gaps between rich and poor cities and encouraged better-educated workers in poor towns to migrate to places where they can get a more attractive return on their skills.

Both theories point to a lack of labour mobility. At an event held at the Federal Reserve on September 26th, Lael Brainard, a Fed governor, lamented the loss of economic opportunities for Americans who live in small towns and are unable to move. “A conventional assumption in economics is that regional differences should narrow over time as workers move toward areas where jobs are more plentiful and wages are higher,” Ms Brainard told the audience. “In reality, Americans’ propensity to move is currently at its lowest level in many decades.”

Read the full briefing on place-based policies here.

Source: The economies of American states and cities are diverging

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