Homeownership, Polarization, and Inequality

This paper asks why job polarization and income inequality are higher in large U.S. cities, and proposes a novel housing-market mechanism that operates independently of — but interacts with — the skill-biased technical change (SBTC) explanations dominant in the existing literature.

The core argument is that large cities have experienced faster growth in house prices relative to both wages (price-wage ratio) and rents (price-rent ratio) since 1980. This excess price growth has priced middle-income households out of homeownership in expensive cities. Because low-income households cannot afford to own anywhere and high-income households can afford to own everywhere, it is specifically middle-income (middle-skilled) households whose location choice becomes entangled with their tenure choice. These households increasingly sort toward smaller, more affordable cities where they can purchase a home. This selective out-migration hollows out the middle of the income distribution in large cities, producing greater employment polarization and income inequality there.

Empirically, the paper uses Census and ACS data from 1980 to 2019 covering 465 commuting zones (CZs). Polarization is measured following Autor and Dorn (2013) by assigning 3-digit occupations to income percentiles fixed at 1980 levels; inequality is measured by the Gini coefficient and variance of log annual wages. Housing costs are captured by hedonic price and rent indices and three derived ratios. OLS and IV results (instrumented using the interaction of land unavailability and long-run changes in real interest rates) show that doubling of prices is associated with a 1 percentage point decline in the middle-skilled employment share; doubling of the price-rent ratio is associated with an 11.3 percentage point decline; doubling of the price-wage ratio with a 5.3 percentage point decline. Inequality follows the same pattern: doubling prices raises 100x the variance of log wages by 2.3 points; doubling the price-rent ratio raises it by 11.7 points; doubling the price-wage ratio by 7.7 points.

The migration mechanism is documented using 2001–2019 CPS ASEC data, which — uniquely among available sources — reports reasons for moving. A doubling of the price index, price-wage ratio, or price-rent ratio in the origin state relative to the destination raises the probability that a middle-income (2nd–4th quintile) household moves for housing-related reasons by approximately 5–10 percentage points in absolute terms, implying a 50–80% relative increase compared with low- or high-income households making a housing-related move.

The theoretical framework extends the standard spatial equilibrium (Rosen-Roback) model with two additions: skill heterogeneity and housing tenure choice. Households face a minimum house size constraint and a payment-to-income (PTI) constraint (calibrated at lambda = 0.308). These constraints create distinct skill thresholds for homeownership that vary by city; the interaction between location and tenure choices applies only to middle-skilled households who can afford ownership in cheap but not expensive cities.

In the quantitative model, calibrated separately for 1980 and 2019 with two locations (top 30 CZs vs. the rest), counterfactual experiments show that holding price-wage ratios at their 1980 levels reduces the excess polarization gap between large and small CZs by 93% and the excess inequality gap by 40%. Holding price-rent ratios constant reduces the polarization gap by 96% and the inequality gap by 27%. By contrast, shutting down SBTC entirely reduces the polarization gap by only 54% and the inequality gap by 73%. These results establish that while SBTC is an important driver, its effect on polarization and inequality is substantially amplified by faster house price growth in large cities; without the housing affordability channel, the effect of SBTC on disproportionate polarization would be 63–81% smaller and on the inequality gap 18–36% smaller.

Q: What is the paper’s central research question? A: The paper asks why job polarization and income inequality are systematically higher in large U.S. cities than in small ones. Prior literature attributed this to skill-biased technical change, external labor demand shocks, or IT-driven displacement of routine jobs; this paper proposes a complementary, housing-market-based explanation that does not rely on features of the production technology.

Q: What is the core mechanism linking house prices to polarization? A: When price-wage and price-rent ratios are higher in large cities, middle-income households face binding minimum-size and payment-to-income constraints that prevent them from owning a home there but not in cheaper cities. Because homeownership carries financial advantages, these households sort toward smaller, more affordable cities. Low-income households cannot afford ownership anywhere and high-income households can afford it anywhere, so only the middle group’s location choice is distorted by tenure considerations. This selective out-migration hollows out the middle of the income distribution in expensive large cities.

Q: What empirical patterns in CZ-level data motivate the paper? A: Doubling CZ size is associated with a 1.9 percentage point greater fall in the middle-skilled employment share and a 2.7 point higher growth in 100x the variance of log wages from 1980 to 2019. Larger CZs also experienced 3.4% higher price growth, 3.1% higher price-wage ratio growth, and a 10% greater increase in price-rent ratios. These associations persist after controlling for initial CZ size and other characteristics.

Q: What do the OLS and IV results show about house prices and polarization? A: A doubling of house prices is associated with a 1 percentage point decline in the middle-skilled share; a doubling of the price-rent ratio with an 11.3 percentage point decline; and a doubling of the price-wage ratio with a 5.3 percentage point decline. IV results using the interaction of land unavailability and the change in real interest rates as an instrument confirm the negative relationship remains statistically significant, suggesting a causal interpretation is plausible.

Q: What do the OLS and IV results show about house prices and income inequality? A: A doubling of prices is associated with a 2.3 point increase in 100x the variance of log wages; a doubling of the price-rent ratio with an 11.7 point increase; and a doubling of the price-wage ratio with a 7.7 point increase. IV results suggest a causal relationship between price growth and income inequality at the CZ level.

Q: What evidence does the paper provide for the migration mechanism? A: Using 2001–2019 CPS ASEC data (which reports stated reasons for moving, unlike the ACS), the paper estimates logit regressions of interstate migration for housing-related reasons. A doubling of the price index in the origin state relative to the destination raises the probability of a housing-related move for middle-income (2nd–4th quintile) households by 5–6 percentage points; a doubling of the price-wage ratio raises it by 6–7 percentage points; and a doubling of the price-rent ratio raises it by 7–10 percentage points. These effects imply a 50–80% relative increase in housing-related migration probability for the middle quintiles compared with the bottom or top quintile. Housing-related movers constitute over 12% of all interstate migrants in the sample.

Q: What is the key finding about homeownership rates? A: There is no statistically significant relationship between the change in homeownership rates and the growth in prices, price-rent, or price-wage ratios from 1980 to 2019. This is consistent with the model’s mechanism, in which middle-income households who cannot afford ownership in large cities move away rather than simply switching to renting there — so aggregate local ownership rates need not fall.

Q: How does the theoretical model generate the polarization result? A: The model extends the Rosen-Roback spatial equilibrium framework with skill heterogeneity and housing tenure choice. Two skill thresholds — one for minimum-size-constrained ownership and one for unconstrained ownership — interact with the price-wage and price-rent ratios of each city. Proposition 1 proves that a city with higher price-wage and price-rent ratios will have a lower middle-skilled share, because middle-skilled workers (those who can afford to own in cheap but not expensive cities) are drawn to cheaper locations. Proposition 2 shows that in a world with only renters or only owners, skill shares would be identical across cities regardless of price differences — the polarization result requires heterogeneity in tenure choice.

Q: What does the no-SBTC counterfactual show? A: Holding the parameters governing local returns to skills at their 1980 levels (shutting down skill-biased technical change) reduces the difference in the decline in the middle-skilled share between large and small CZs by 54% and the gap in the increase in the variance of log wages by 73%. This is broadly consistent with prior literature attributing the bulk of disproportionate polarization and inequality in big cities to SBTC.

Q: What do the constant price-ratio counterfactuals show? A: When price-wage ratios are held at 1980 levels (but SBTC is allowed to operate), the excess polarization gap between large and small CZs falls by 93% and the excess inequality gap by 40%. When price-rent ratios are held at 1980 levels, the polarization gap falls by 96% and the inequality gap by 27%. When both are held constant simultaneously, the polarization gap falls by 89% and the inequality gap by 27%. These results show that the effect of SBTC on polarization would be 63–81% smaller in the absence of the housing affordability amplification channel.

Q: Who are the largest losers from rising price-wage ratios in large cities? A: The counterfactual welfare analysis identifies middle-skilled workers with skill levels between approximately 0.29 and 0.80 as the primary losers. In the counterfactual with fixed price-wage ratios, workers with skills from 0.29 to 0.57 who previously could not afford ownership in large cities are now able to own there, and those with skills from 0.57 to 0.80 spend a smaller share of income on housing. This group either lost homeownership opportunities or was induced to move to less productive CZs by the actual price growth that occurred.

Q: How is the quantitative model calibrated and structured? A: The model is calibrated separately for 1980 and 2019 as two stationary spatial equilibria. It features two locations (the top 30 CZs, which account for 49.3% of employment, and the remaining CZs). Key parameters include a Frechet elasticity of 6.1, an agglomeration externality of 0.04, a PTI constraint of 0.308, and an annual discount factor of 0.96. Land shares differ between large and small CZs (0.3965 vs. 0.2239). The model finds that the price-rent ratio was relatively stable in large cities but fell in small ones, while the price-wage ratio increased much more in large CZs — both indicators point to purchasing a home becoming relatively more expensive in large CZs.

Q: What are the paper’s policy implications? A: Zoning reforms and other policies that increase housing supply in large, unaffordable cities could produce a more efficient spatial allocation of labor, greater aggregate productivity, and more economically diverse — less polarized and less unequal — cities, while also reducing the wealth gap between owners and renters. Policies that promote homeownership by reducing the cost of owning without raising housing supply may reduce local polarization and inequality but could lower aggregate output and do not necessarily increase homeownership rates.

Q: How does this paper relate to existing explanations for city-level polarization? A: The paper’s housing-market mechanism is explicitly complementary to SBTC-based explanations (Baum-Snow, Freedman, and Pavan, 2018; Cerina et al., 2023), external demand shock explanations (Davis, Mengus, and Michalski, 2020), and IT-displacement explanations (Eeckhout, Hedtrich, and Pinheiro, 2024). The paper’s key added contribution is that even if SBTC were the primary driver of disproportionate polarization, its measured effect would be substantially smaller in the absence of faster house price growth in large cities — the housing market amplifies rather than replaces the technology channel.

Job polarization (city-level): The hollowing out of middle-income employment shares in a commuting zone, measured as the change in the share of workers in occupations assigned to the 21st–80th income percentile (using the 1980 occupation-to-percentile mapping fixed over time). In this paper, polarization is greater in cities where price-wage and price-rent ratios grew faster, attributed to selective out-migration of middle-skilled households.

Price-wage ratio: The ratio of hedonic house prices to median annual wages in a commuting zone, constructed from Census and ACS data. A higher price-wage ratio tightens the payment-to-income constraint on potential homebuyers and is the primary driver of the skill threshold for homeownership in the model.

Price-rent ratio: The ratio of hedonic house prices to rents in a commuting zone. In the model, a higher price-rent ratio reduces the financial advantage of owning over renting, raising the skill threshold at which ownership becomes optimal. The paper treats price-rent and price-wage ratios as distinct channels that both independently amplify polarization.

Housing tenure choice: The household decision to own or rent, modeled as a discrete choice made at the start of life that interacts with location choice. Ownership requires satisfying both a minimum house size constraint and a payment-to-income (PTI) constraint (lambda = 0.308). The interaction between tenure and location choices is the paper’s key model innovation; it exists only for middle-skilled workers whose income is sufficient for ownership in cheap but not expensive cities.

Skill threshold for homeownership (s*_i): The minimum skill level at which a worker in city i chooses to own rather than rent, defined by Lemma 2. This threshold is decreasing in local labor productivity and increasing in price-wage and price-rent ratios. Workers with skill below s*_i in all cities always rent; those with skill above s*_i in all cities always own; those in between face city-dependent tenure choice that distorts their location decision.

Skill-biased technical change (SBTC): In the paper’s quantitative model, SBTC is represented by faster growth in the skill dispersion parameter (alpha_it) in large CZs, reflecting differential productivity growth concentrated at the top of the skill distribution. The paper finds SBTC accounts for 54% of the polarization gap and 73% of the inequality gap in its counterfactual, but argues its effect is amplified 4–5x by the housing affordability channel.

Payment-to-income (PTI) constraint: The constraint that a homebuyer cannot spend more than a fraction lambda (calibrated at 0.308) of annual labor earnings on the annual housing payment (user cost times price times quantity). This constraint, together with the minimum house size, determines the income threshold for ownership and makes location and tenure choices interdependent for middle-skilled workers.