Why is it hard to enter: Land Use (Pages 114 to 117 of Stuck! The Law and Economics of Residential Stability, Yale Law Journal, Vol. 127)

Of limits on mobility, the best understood in the legal and economic literatures are land-use regulations. Before the 1970s, land-use restrictions (zoning laws, subdivision regulations, historic preservation, and so on) limited access to some towns or communities, usually rich suburbs. They did not, however, cap housing construction in entire metropolitan regions. Builders could always construct new housing, either in downtowns or on the urban fringe.

Something dramatic happened to land-use regulation in the 1970s and 1980s: it became much, much stricter. Importantly, while this phenomenon affected all types of municipalities — from urban downtowns to inner-ring suburbs to exurbs — it only occurred in particular regions of the country. In particular, coastal metropolitan regions like San Francisco, New York, and Boston restricted construction in cities, suburbs, and exurbs. Because these popular regions restricted new housing, demand for living space outpaced supply. Housing prices soared, but population growth did not.

In contrast to these coastal regions, Southern and Southwestern metropolitan areas like Houston, Phoenix, and Atlanta continued to impose minimal land-use restrictions. Though demand to live in these regions grew as well, this demand led to increased housing construction and population, rather than substantially higher housing prices.

Because the most restrictive regions tend to be the nation’s richest, their lethargic population growth has reduced levels of wealth in the United States as a whole. As previously described, Hsieh and Moretti estimate that GDP would be 8.9% higher if land-use restrictions were reduced in three restrictive regions: Silicon Valley, San Francisco, and New York. And once again, because barriers to mobility reduce the capture of information spillovers, land-use restrictions may indirectly impede growth as well.

Land-use restrictions also contribute to economic inequality. Because these restrictions raise the cost of housing, they disproportionately prevent poor and working-class people from taking advantage of high-wage job markets. Housing costs eat up a larger percentage of a poor person’s paycheck than that of a wealthy person. Thus, even in a city that can provide marginally higher wages, low-income persons simply may not be able to afford the cost of living in rich, land-use-restricted areas. While nominal incomes for janitors in New York are much higher than in poor states in the Deep South, real incomes, factoring in housing costs, are lower. As a result, restrictive land-use rules have meant that poor and middle-class people have little incentive to move to places where higher incomes are available. Therefore, these restrictions reduce labor income at the bottom of the income distribution. As Jason Furman, former Chair of the Council of Economic Advisers, notes, land-use restrictions “can increase inequality by reducing one of the channels through which workers get a raise, specifically moving from job to job.”

This is no small effect. Thomas Piketty famously argued that increasing returns to capital relative to economic growth are a major driver of economic inequality. But Matthew Rognile and others have found that nearly all of the increased returns to capital in Piketty’s work came from housing capital: “The long-term increase in capital’s net share of income in large developed countries has consisted entirely of housing.” This is a stark and important finding: Piketty’s result about capital is almost exclusively about real estate. Why? The most important reason is land-use restrictions.