Homeownership, Polarization, and Inequality

In recent decades, the U.S. labor market has become more unequal and polarized: wage differences have widened and middle-income jobs have been replaced by low- and high-income jobs. The rise in inequality and polarization have been more pronounced in large cities. I argue that this can be explained by higher house price growth in big cities, which makes it harder for middle-income households to buy a house there. I build a spatial equilibrium model in which households differ by skill, and choose where to live and whether to rent or own housing. Low-skilled households cannot afford to buy in any location, while the high-skilled can buy anywhere. Meanwhile, the middle-skilled can only buy a house in affordable places. Thus, the middle of the skill distribution in expensive locations empties out, making them more polarized and unequal. Empirical evidence supports these predictions. First, middle-income households are more likely to move to states with lower house prices for housing-related reasons than those with low or high income. Second, polarization and inequality grew more in commuting zones where prices increased the most. Counterfactual experiments show that rising price-wage and price-rent ratios account for 12% to 21% of the increase in low and high-paid jobs and for 7% to 10% of the growth in the variance of log wages in the 20 largest commuting zones since 1980