Some history: Starting in the late 1990s, the combined forces of globalization and technological change drove up demand for housing in the large metropolitan areas of the U.S. East and West Coasts. To oversimplify, automation and rapidly growing trade — especially with China — hurt regional economies in the middle of the country, which are more focused on producing and distributing goods, and helped the economies on the coasts, which tend to be more focused on high-skilled services.
The market-based response to this shift would have been a migration, particularly of younger workers, to higher-wage jobs on the coasts. For a variety of reasons, however — most prominently, the high cost of housing — this did not happen. And housing was so expensive in part because of local restrictions on where and what kinds of it could be built.
Housing cost so much that by 2000, net earnings for workers without a college degree were barely higher in big coastal metropolitan areas than they were in the middle of the country. By 2015, they were more than 10% lower. This eliminated the incentive to move and left millions of Americans essentially stranded in economically stagnant towns, particularly in the Rust Belt. The negative economic impact of this stunted internal migration is difficult to overestimate.
Fast forward to the present day: As the U.S. economy haltingly recovers from Covid, rents are starting rise just about everywhere — but there is a distinct geographical pattern.
The rent increases are relatively mild in cities such as New York. They are more substantial in places such as Nashville, Tenn., and they are soaring in recreation-oriented destinations such as Blaine, Idaho. That last bit of data indicates that the work-from-home trend has led some well-paid professionals to ditch the city in favor of more rural environs.
It also seems to be pushing some folks toward lower-cost locations. These younger professionals, with incomes that count as modest if they live on the coasts but are still above the national average, have not only substantial purchasing power but sometimes also new families that need housing.
In the first half of 2021 small towns and rural areas saw twice as many businesses move in as out, while the urban cores on net lost establishments. Crucially, the scale of this migration does not have to be great for the net effects on local economies to be large.
Even if the newcomers don’t expand the employment of local firms — because they are working remotely for their old employers — they have more purchasing power, which means they might require more service workers. Just expanding the stock of housing would mean more construction workers, who are ultimately paid with money originating from outside the local economy.
This inflow of funds creates a multiplier effect, where the new local service workers themselves add to local demand. It’s the opposite of the downward spiral that occurred in many places after the closure of a major plant or factory.
Of course, the areas that lost industrial jobs over the last few decades are not necessarily the places that are gaining remote workers today. The important thing, however, is that smaller towns typically have fewer restrictions on land use. This means greater demand for housing will not necessarily translate into higher rents, but increased housing supply.
The flexibility of remote work means that areas which do allow their housing stock to expand should attract more remote workers. As long as that’s the case, the possibility exists for lower-skilled non-remote workers to be able to move to where demand is greatest.
It’s hard to say whether this move toward remote work has staying power. But the early signs are encouraging. If the trend persists, the U.S. could see a reversal of one the most punishing developments of the last few decades — and a rise in the productivity and standard of living for lower-skilled Americans.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.
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