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

The convergence of per capita incomes across U.S. states from 1880 to 1980 is one of the most striking patterns in macroeconomics. For over a century, incomes across states converged at a rate of 1.8 percent per year. Over the past 30 years, this relationship has weakened dramatically; the convergence rate from 1990 to 2010 was less than half the historical norm, and in the period leading up to the Great Recession, there was virtually no convergence at all. During the century-long era of strong convergence, population also flowed from poor to rich states. Like convergence, however, this historical pattern has declined over the past 30 years.

This paper links these two fundamental reversals in regional economics using a model of local labor markets. The model considers a hypothetical world with two locations. When the population in a location rises, wage rates fall. When the local housing supply is unconstrained, workers of all skill types will choose to move to the productive locations. This migration pushes down wages and skill differences, generating income convergence. Unskilled workers are more sensitive to changes in housing prices. When housing supply becomes constrained in the productive areas, housing becomes particularly expensive for unskilled workers. These price increases slow the labor and human capital rebalancing that generated convergence.

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