Housing Affordability and Worker Sorting: The Link Between Wages and Migration

The study examines how rising housing costs in Germany drive geographic skill sorting, with high-income workers clustering in cities while lower-income individuals relocate to affordable areas, exacerbating economic inequality. It highlights the role of non-homothetic housing demand in shaping labor mobility and suggests policy interventions to mitigate regional disparities.

The working paper "Non-homothetic Housing Demand and Geographic Worker Sorting" by Nina Furbach, published by the European Central Bank (ECB), examines the relationship between housing costs, income disparities, and labor market mobility. The research incorporates data from institutions such as the Institute for Employment Research, the German Socio-Economic Panel (GSOEP), and the OECD to analyze how housing expenditure patterns influence the geographic distribution of workers. In many Western economies, a growing housing crisis is exacerbating income inequality. In Germany, house prices surged by 47% between 2010 and 2020, making homeownership and rental costs increasingly unaffordable for low-income households. Because lower-income individuals allocate a larger share of their earnings to housing, they are particularly vulnerable to price hikes. The study explores whether escalating housing costs are forcing lower-income workers out of expensive urban centers, creating a pattern where high-income professionals cluster in cities while low-income workers move to more affordable but economically less dynamic areas.

How Housing Demand Shapes Migration Patterns

To better understand the dynamics of housing costs and labor market mobility, the study employs a quantitative spatial model that incorporates non-homothetic preferences. Traditional economic models assume that housing demand is proportional to income, meaning that all households allocate similar proportions of their earnings to housing. However, real-world data suggests otherwise—higher-income households tend to spend a smaller percentage of their income on housing, making them less sensitive to rising housing costs than lower-income households. By integrating this economic reality into the model, the study provides a more accurate picture of migration patterns. The model is calibrated using German labor market data from 2007 to 2017, covering 141 labor market regions, and considers worker preferences, regional productivity, housing supply constraints, and congestion effects. The findings indicate that an increase in high-skilled workers in major cities has contributed to rising house prices, explaining 10% of the national house price increase and 11% of regional price variations.

The Growing Divide Between High- and Low-Income Workers

One of the study's key findings is that lower-income households dedicate a significantly higher share of their income to housing than their wealthier counterparts. Using survey data from 2010 to 2014, it estimates that a 100% increase in total household expenditure leads to a 30% decrease in the share spent on housing. This means that as wages rise, housing costs become relatively less significant for higher earners, while lower-income workers remain disproportionately affected. As house prices increase, the affordability crisis pushes lower-income individuals away from high-cost urban centers. This creates a self-reinforcing cycle: high-skilled professionals move to major cities where wages are higher, increasing demand for housing and driving prices up further. Meanwhile, lower-income workers are displaced to smaller cities and rural areas, where job opportunities are scarcer, and wages are lower. This geographic sorting leads to greater wage inequality, as workers in high-cost cities continue to benefit from economic growth while those in more affordable regions face stagnating wages and limited job prospects.

Can Public Policy Reverse the Trend?

The study examines whether government intervention can mitigate the effects of rising housing costs and geographic sorting. It evaluates place-based policies such as taxation and redistribution schemes that could incentivize a more balanced distribution of workers across regions. The findings suggest that by 2017, the degree of skill sorting had exceeded optimal levels, meaning that more workers were clustering in expensive regions than would be socially efficient. The study suggests that policies encouraging high-skilled workers to relocate to lower-cost areas could ease pressure on housing markets in major cities. Expanding affordable housing in urban areas could also help low-income workers remain in cities, improving their access to better-paying jobs. However, the study concludes that while these policies could have some effect, their impact would likely be limited. Broader economic forces—such as wage disparities and labor demand—continue to drive urban migration, meaning that government interventions alone cannot fully counteract the trend.

Housing Costs: A Key Driver of Economic Disparities

The research highlights that non-homothetic housing preferences play a crucial role in shaping urban housing markets and labor mobility. The study's model demonstrates that a national increase in high-skilled workers accounts for a significant portion of rising house prices and regional skill sorting. Since lower-income individuals are more sensitive to housing costs, they are more likely to relocate to less expensive regions. While tax and transfer policies can help to moderate some of these geographic disparities, they cannot fully counteract the strong market forces that shape urban migration and housing affordability. The broader implications of this study suggest that housing costs are not just a consequence of economic inequality but also a significant driver of it. As housing costs continue to rise, they will likely reinforce disparities in job opportunities, education, and social mobility. Without targeted interventions to increase affordable housing supply, the cycle of rising house prices, worker displacement, and economic inequality is likely to persist.

Policymakers must recognize the critical role of housing in shaping economic mobility and labor market outcomes. The findings suggest that while redistribution policies can help alleviate some disparities, they are unlikely to fully reverse the trend of geographic skill sorting. To ensure that cities remain accessible to workers of all income levels, a focus on expanding affordable housing and improving access to job opportunities in lower-cost areas is essential. Addressing the housing crisis will not only reduce economic inequality but also promote a more balanced and dynamic labor market.