(Bloomberg Opinion) -- Here’s an unsettling fact: Economic inequality between U.S. states can be greater than inequality between the U.S. and other countries. For example, GDP per person in the state of New York is about twice as high as in Mississippi. The gap between the U.S. as a whole and the nation of Slovakia is smaller.
These figures come from the International Monetary Fund’s October 2019 World Economic Outlook. They matter in part because wide disparities between a country’s different regions could reflect barriers to worker mobility.
If one area has lower wages than most other parts of the country, then you would expect more workers to move to economic hubs where wages are higher and opportunities are better. This migration would reduce wages in the higher-income places by increasing the size of the workforce, while raising pay in regions where growth is sluggish, since fewer workers would be competing for a relatively small number of jobs. Over time, wages between the regions should move closer together.
If this isn’t happening, then something may be hampering the willingness or ability of people to move. It also suggests that productivity growth is slower than it would otherwise be, because workers in the places left behind are not being put to their best use.
Persistent regional inequality also makes it harder for a nation as a whole to respond to economic shocks. If international trade or technological advances cause factories to shut down in one area, migration should help return that locality to full employment and economic health because many of the unemployed would move to parts of the country with better job prospects.
If this doesn’t happen, and long-term unemployment develops, a nation’s overall economy suffers, and the effect of the shock lingers. The IMF’s analysis shows that the lagging region would suffer disproportionately from this lack of out-migration.
The human consequences of regional inequality make the problem worse. The IMF reports that regions with higher long-term and youth unemployment and less workforce participation also have relatively lower life expectancy and higher infant mortality.
In the U.S., populist frustration has been driven in part by a wide divergence in economic outcomes between coastal urban centers and struggling industrial and rural areas. Despite the strong U.S. economy, Mississippi’s unemployment rate is over twice as high as Virginia’s. San Francisco has a 2.3% unemployment rate, while West Virginia’s is 4.8%.
Populism is continuing to animate both political parties, and the response of some on the right as well as on the left to regional inequality is to attack the capitalist system itself. Instead of blasting the free-enterprise system, the way to address regional inequality is through sound public policy.
Governments should ease existing restrictions on the supply of housing. Economists Peter Ganong and Daniel Shoag document that increasing home prices have reduced the financial rewards of moving to many higher-performing areas. They find that land-use restrictions are suppressing supply and impeding population flows into high-income regions of the U.S.
University of Minnesota economists Janna E. Johnson and Morris M. Kleiner find that occupational licensing requirements act as a barrier to interstate migration. The rate that individuals in occupations with state-specific licensing exam requirements — for example, pest control workers, barbers and dental hygienists — move between states is 36% lower than for people in other fields, according to their 2017 study. While often necessary for public health and safety, many licensing requirements act as little more than a barrier to entry, protecting incumbent workers in an occupation.
Policy has traditionally focused on helping people, not places — and for good reason. For one, so-called place-based policies could easily create barriers to mobility by offering special incentives and programs that people would lose if they moved to a new state. A principle of policy design is that people in similar circumstances should be treated the same. Place-based programs often treat people with the same income and similar characteristics differently only because of where they live.
And these policies can easily have results that are different from what their proponents expected. For example, a provision in the 2017 Republican tax law was intended to help certain low-income neighborhoods, called “opportunity zones,” by offering tax benefits for investing in those places. Instead, early reports suggest that many of the projects receiving the tax benefits — for example, high-end apartment buildings and housing for students in college towns — won’t help low-income workers, but will still be great financial deals for investors.
Having said that, one promising place-based policy is relocation assistance. The idea is simple: Offer long-term unemployed workers — those who have been unsuccessfully looking for a job for at least six months — in lagging economic areas a federal subsidy to offset the costs of moving to a better-performing region.
Moving is a major investment. Even workers who want to move to a city with improved economic prospects may be deterred by the need for so much up-front cash. The subsidy could help overcome this constraint.
It is attractive because it directly addresses the problem: If you’re worried about regions being permanently left behind, and if a key driver of regional disparities is too little worker mobility, then subsidize mobility so that you get more of it.
That would help the lagging localities by accelerating wage growth, quickening recovery time from the disruption caused by trade and technology, and reducing rates of chronic unemployment and its associated maladies.
And more important, it would advance economic opportunity for some American workers who need it most.
To contact the editor responsible for this story: Katy Roberts at kroberts29@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute. He is the editor of “The U.S. Labor Market: Questions and Challenges for Public Policy.”
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