More Permissive Zoning Codes Could Make U.S. Workers Richer

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Economists find that strict housing regulations may significantly lower U.S. gross domestic product.

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Someone struggling to pay rent in Philadelphia does not care whether the San Francisco Board of Supervisors grants a permit for a new apartment building in San Francisco’s Russian Hill neighborhood.

But maybe they should.

According to a recent paper, relaxing land use regulations in the San Francisco Bay Area and New York City could increase the average U.S. worker’s income by almost $9,000 a year and add trillions to the economy.

Economists Chang-Tai Hsieh of the University of Chicago and Enrico Moretti of the University of California, Berkeley argue that U.S. workers are poorer because certain cities use zoning to constrain their housing supply, limiting the number of workers who can share in those cities’ economic success. They conclude that these exclusionary zoning policies lowered the U.S. gross domestic product (GDP) by more than 50 percent between 1964 and 2009.

Hsieh and Moretti observe that the American economy and labor market have changed over the last half-century. The populations and economies in the once-booming Rust Belt—including cities like Cleveland and Detroit—have declined after the loss of their manufacturing industries. In contrast, the Bay Area and New York City have experienced some of the largest growth in labor productivity over the last 50 years.

During the same period, city councils and zoning boards across the country adopted new land use regulations to reflect these economic and demographic shifts.

Zoning can prevent the mixing of incompatible land uses by restricting different types of uses to different areas, known as zoning districts. If a developer proposed building a landfill next to a neighborhood elementary school, a city’s zoning code would likely make that impossible.

But zoning can also prevent certain people from moving into a neighborhood and can block the development of additional housing units.

In the Bay Area and in New York City, zoning changes over the last half-century limited these cities’ ability to increase their housing supply. Like other scarce goods, limiting the supply of housing causes an increase in housing costs.

Hsieh and Moretti argue that by restricting housing supply and increasing housing prices, the size of the Bay Area and New York City’s workforce did not grow in tandem with its productivity. Hsieh and Moretti contend that, as a result, fewer workers had the ability to benefit from the cities’ increased employment levels and wages. They claim that this mismatch prevented both the individual cities, as well as the country, from maximizing its economic potential.

Had the Bay Area and New York City accommodated more housing growth over the last half-century by adopting land use regulations no stricter than those of the median U.S. city, Hsieh and Moretti contend, more workers would have had access to higher wages. Their model estimates that this increase in access would have created nearly $2 trillion in new wealth in 2009 alone.

Of course, as Hsieh and Moretti explain, if workers were better able to find affordable housing in the Bay Area or New York City, they would leave behind other, less productive cities.

Hsieh and Moretti’s model demonstrates that permitting more housing in the Bay Area and in New York City would cripple less productive cities’ economies—particularly those in the Rust Belt. For instance, Binghamton, New York would see a 169 percent decrease in employment and Youngstown, Ohio’s employment would decrease a staggering 218 percent.

Absent substantial changes in cities’ zoning codes, Hsieh and Moretti nevertheless claim that policies exist that would counteract restrictive land use regulations’ effect on the economy.

Hsieh and Moretti advocate for shifting land use decision-making from the local level to either the federal or state government. Because restricting housing supply through land use regulations has national consequences, they suggest that the U.S. Congress or state legislatures should follow the lead of other countries, where regional and national governments control and coordinate the land use planning process.

For example, in the United Kingdom, local governments can create their own plans but are restricted to using zoning districts developed at the national level. Single-family homes and multi-family buildings fall within the same residential zoning category, which prevents jurisdictions from becoming solely single-family home communities.

Hsieh and Moretti also propose increasing investments in public transportation to connect highly productive cities to less productive labor markets.

Hsieh and Moretti consider London and Tokyo to be models of highly productive cities with vast public transportation systems. The extensive network of commuter rail, subways, and buses allow workers to commute long distances to tap into London and Tokyo’s labor markets and access higher wages. Hsieh and Moretti conclude that absent rich transportation networks, British and Japanese GDP would be lower.

These proposals may no longer be just a pipe dream.

In September 2017, California Governor Jerry Brown signed into law four bills aimed at increasing housing affordability. One of the bills, SB 167, restricts municipalities’ ability to deny housing projects during the zoning approval process. The law relaxes some of the local constraints on housing supply identified by Hsieh and Moretti as impediments to economic growth.