Gerard Flynn/Flickr

Housing-supply constraints in three cities—New York, San Francisco, and San Jose—add up to a loss of more than 10 percent of U.S. GDP.

Silicon Valley enjoys sky-high labor demand and soaring wages. Yet for such a significant global nexus of economic activity, the population density in San Jose and San Francisco is incredibly low. Incumbent homeowners don’t want to share the wealth, so they enact housing policies that keep new workers out.

Protectionist housing policies are bad for people who’d like to work in Silicon Valley, of course. But NIMBYism is also bad for the nation as a whole. Even though labor productivity has grown the most over the last few decades in three specific U.S. cities—New York, San Francisco, and San Jose—that local growth hasn’t translated to greater national growth at all, thanks to a lack of housing.

In fact, NIMBY policies that restrict the supply of housing in those cities are a drag on the national economy. That’s the finding in a new paper by Chang-Tai Hsieh and Enrico Moretti released by the National Bureau of Economic Research. The researchers show that increased “wage dispersion” from 1964 to 2009 has held back U.S. GDP growth by a whopping 13.5 percent of what it could be.

“This amounts to an annual wage increase of $8,775 for the average worker,” the paper reads.

Hsieh and Moretti came up with a way to measure what local output and national growth would look like if wage dispersion were equalized. They proposed a model that lowered the regulatory housing constraints in New York, San Francisco, and San Jose to the level of a median city. If workers were able to cross over from low-wage cities to high-wage cities—that is, if New York, San Francisco, and San Jose were to lower barriers to new housing and let them in—then GDP could rise by 9.5 percent.

(Stephen Woods/Flickr)

The study finds an enormous gap between a city’s contribution to aggregate growth, on the one hand, and the growth of a city’s own GDP. New York, for example, enjoyed significant growth from 1964 to 2009. But most of it took the form of higher nominal wages, a factor that contributes to the “spatial misallocation of labor,” according to the researchers.

This gap was particularly striking for three cities—New York, San Francisco, and San Jose—thanks to the explosion in tech and finance over the last four decades. “Although local output grew rapidly in all three cities, so did the gap between local wages and the nationwide wage,” the paper reads.

Aggregate U.S. productivity between 1964 and 2009 had little to do with the tech or finance sectors. That’s because the stunning local growth of New York, San Francisco, and San Jose is best measured by soaring housing prices and high nominal wages—not by increased employment. Three-quarters of the growth in U.S. GDP was the result of growth in cities across the South plus a group of 19 other major cities, including Boston, Chicago, Los Angeles, and Philadelphia.

In fact, the tech and finance contribution to aggregate growth was so little that New York, San Francisco, and San Jose taken together contributed as much to U.S. GDP growth as Detroit and other Rust Belt cities—places that suffered negative local growth.

(National Bureau of Economic Research)

How can New York, San Francisco, and San Jose start pulling their weight? There are two plain answers. One is that cities can provide better public transportation bridging low-wage and high-wage areas. The other answer is more direct: Cities can start saying yes to new housing.

Incumbent homeowners are controlling access to two of the most productive labor markets in the nation. As the researchers note, these restrictions impose negative externalities that affect all workers. If cities cannot curb their NIMBY impulses, maybe the federal government should.

Photo by Gerard Flynn via Flickr

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