Home Prices Push Low-Wage Workers Out of Cities

Sales of single-family homes in the U.S. rose by 5.7% in September, the highest rate since April 2010.

Most would argue that these numbers are indicative of an improving economy — an increase in housing sales leads to an increase in housing prices. Daniel Shoag, associate professor of Public Policy at Harvard's Kennedy School, would argue the opposite.

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High housing prices actually decrease income mobility and ultimately hurt the U.S. economy, according to a new study by Shoag and his colleague Peter Gangong.

"What higher housing prices have done," Shoag tells the Daily Ticker, "is they've taken half the country off of this income convergence track." Certain U.S. cities have "become prohibitively expensive for low-skilled workers and they've sort of become segregated places full of high-skilled workers. That's contributed to regional income inequality and played a part of the rising income inequality that we see."

Laborers are being priced out of cities like San Francisco and New York City and migrating to smaller cities like Las Vegas and Phoenix. This phenomenon slows economic growth, Shoag argues.

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"San Francisco and Boston are rich places," he says, "but people aren't moving to those places any more. They're moving to mid-wage places like Las Vegas and Phoenix and what's happened is that the people moving to Boston tend to be high-skilled workers and the people moving out tend to be lower-skilled workers. That's driven this differential in income and stopped this process of convergence."

Since 1980 the rate of income convergence has been stagnant. The average income of U.S. workers has remained flat for the past 30 years and the migration of low-skilled workers across states has also slowed significantly.

This hasn't always been the case. Between 1880 and 1980 low-skilled workers moved to wealthier states and the average incomes between states converged by an average of 1.8% per year.

So why has the cost of housing changed so drastically in the past 30 years?

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An increase in land regulation in high-wage states and cities discourage development that would lower housing prices, says Shoag.

"It's surprising that local regulations can have such a big macroeconomic impact...that they can affect this process of income migration and conversion, which are long-standing macroeconomic relationships," he notes.

Policies, however, can be reversed: Shoag has already been contacted by lawmakers in Washington in hopes of figuring out how to encourage new, affordable developments in high-wage places.

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