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

The past thirty years have seen a dramatic decline in the rate of income convergence across states and in population flows to wealthy places. These changes coincide with (1) an increase in housing prices in productive areas, (2) a divergence in the skill-specific returns to living in those places, and (3) a redirection of unskilled migration away from productive places. We develop a model in which rising housing prices in wealthy areas deter unskilled migration and slow income convergence. Using a new panel measure of housing supply regulations, we demonstrate the importance of this channel in the data. Income convergence continues in less-regulated places, while it has mostly stopped in places with more regulation.

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