If there’s one question in modern economics that confounds researchers and should worry the rest of us, it’s the phenomenon of slowing productivity growth.
Worker productivity is simply the number of man hours it takes to create all the things that Americans make, from automobiles to a Hollywood blockbuster. The faster productivity grows, the more wealth we can create with less effort. As you can see from this chart below from economist Robert Gordon, worker productivity has been growing more slowly since the 1970s than during most of American industrial history, and the past 10 years have been particularly sluggish:
What’s behind the slowdown? One theory suggests that the rise in zoning laws and land-use restrictions, which prevent city’s populations from growing, has put a damper on productivity. To support this idea, economist Edward Glaeser has described why cities are so important to economic growth:
We are a social species and we learn by being around clever people. Cities have long sped this flow of ideas. Eighteenth-century Birmingham saw textile innovators borrow each other’s insights – and gave us the industrial revolution. Today, older, colder US cities (such as Boston and Chicago) survived deindustrialisation by grabbing on to innovations in finance, computers and biotechnology.
These urban comebacks have let growth theorists better understand the economics of “agglomeration” or why people and businesses become more productive by locating near one another in dense areas. Physical proximity allows the free flow of goods, services and ideas – and this powers the collaboration that creates everything from Ford’s Model T to Facebook, and economic growth too.
In a working paper released on Monday by the National Bureau of Economic Research, economists Chang-Tai Hsieh and Enrico Moretti estimate the effect land-use restrictions have had on economic growth since the 1960s. They break down U.S. Growth into metro areas and find that while highly innovative hubs like New York, San Jose, and San Francisco have grown quickly, they have contributed relatively little to overall growth in the U.S.
Hsieh and Moretti find that if workers were able to seamlessly leave less productive areas and move to regions that have become more productive, the U.S. Economy would have grown 0.3% more per year from 1964 to 2009. That amounts to $1.95 trillion more in GDP, or an annual wage increase of $8,775 for the average worker.
The researchers have found that location is becoming increasingly important for worker productivity, making land-use restrictions in cities (and surrounding suburbs) like New York and San Francisco increasingly costly to the U.S. Economy. One remedy? Giving some say in land-use laws to the federal government. Hseih and Moretti write:
Currently, municipalities set land use regulations in almost complete autonomy since the effect of such regulations have long been thought as only local. But if such policies have meaningful nationwide effects, then the adoption of federal standard intended to limit negative externalities may be in the aggregate interest.