Durable Housing and Urban Decline

Glaeser and Gyourko 2005

Glaeser and Gyourko have a very nifty paper from 2005 on urban decline. The central insight is playing out what makes housing different from lots of other goods — its durability. Housing stocks, when not constrained by zoning laws, can go up quickly when demand increases, but they do not decrease in any meaningful sense when demand goes down. This means that the price of housing shouldn’t increase much when a city is growing (as compared to the cost of construction), but should plummet when demand falls. Because of the price decreasing, we should expect the cities population to not fall much when a city goes into decline, and that is exactly what we find. Ghost towns are incredibly rare in the United States. People will sort too, so that people who are more disconnected from the labor markets will populate declining cities. Declining cities will become populated by the elderly, and by those on welfare. Young people with good prospects will move anywhere else. 

This suggests that urban decline will be extremely hard to undo. It is difficult to elicit individual characteristics, and so employers will resort to stereotypes. Any smart, young, ambitious person would relocate to growing cities, where firms will prefer to be located. If it is easier for individuals to relocate than groups, we should expect people to move where the jobs are, not the other way around. When the cost of housing is below the cost of constructing new housing, we should expect it to remain that way for a very long time. Additionally, people impose negative externalities on everyone around them, as Chetty-Hendren-Katz found, and I wrote about here. There seem to be some benefits from breaking up pockets of concentrated poverty, although I must emphasize that it is not a panacea. The primary problem facing the poor is who they are, not (directly) their circumstances. It is possible that people remaining in declining areas is socially sub-optimal for this reason, though I am skeptical it calls for much policy intervention.

At first I thought that Kremer’s O-ring model would be applicable here, but I changed my mind. In that model, if employers cannot perfectly detect skill your returns to acquiring skill are dependent upon what other people do. Areas can be stuck in low-skill attainment equilibria which no one wants to be in. The possibility of movement, though, breaks that. It is still worthwhile to invest in skill if you can move. This is why we might expect immigration to raise human capital in a country, even if only the very top are immigrating, and why the arguments against immigration on the basis of “brain drain” are likely fallacious. 

This isn’t a world-shattering paper by any stretch of the imagination. Nevertheless, it is clean, elegant, and makes strong predictions which are borne out by empirical evidence. This is economics at its best.