Reducing Unemployment with Relocation Vouchers

The relative lack of mobility of less educated Americans has large economic costs. We have seen that the changes in the global and national economy are causing an increase in inequality among workers with different skill levels, with the less skilled being hit the hardest. Differences in geographical mobility, coupled with increasing polarization among American cities, only exacerbate the problem. Thus, some of the earning inequality between highly skilled and low-skilled workers reflects mobility differences: if the less educated people were more able and willing to move to cities with better job opportunities, the gap between college graduates and high school graduates would shrink.

 By being less mobile, less educated workers are also significantly more likely to be unemployed. Figure 10 shows the difference in unemployment rates for different educational groups over the past twenty years. Unemployment among all groups fluctuates, depending on the strength of the national economy. It was high in the early 1990s, reached its lowest level at the peak of the dot-com boom in 2000, and climbed up sharply during the Great Recession of 2008–2010.

But the most interesting feature of the graph is that in both good and bad years, college graduates—the group with the highest mobility—have the lowest unemployment rate, while high school dropouts—the group with the lowest mobility—consistently have the highest unemployment rate. High school graduates and workers with a community college education are in between. While the difference in unemployment rates reflects many factors, the willingness to move is an important difference among the four groups. It is not just that less educated individuals are more likely to be out of work at any particular time; they also have to deal with the long-term consequences. Evidence indicates that workers’ skills tend to deteriorate during long bouts of unemployment, and this further widens the gulf between the skilled and the unskilled.

Why does a lack of education lead to lower mobility? For some, it reflects a dearth of information about opportunities elsewhere, a shortage of the kinds of skills necessary to make a big life change, and especially a lack of cash. Relocating is like an investment: you spend money up front, to cover the direct costs of the move and your living expenses until a job becomes available, in exchange for a better job later. But many unemployed workers with low skills are unable to make this investment, because they have limited savings and limited access to credit. In this case, the lack of mobility is not a choice but the result of external constraints that limit people’s freedom of movement. In other cases, the lower propensity to move reflects cultural differences between the two groups. Like some Italians, some less educated Americans choose not to move away, presumably because they value staying near their family and friends more than better job prospects. Although this has an economic cost, it is a perfectly legitimate choice.

 This distinction between causes is important, because it suggests a policy reform that could end up helping those workers whose lack of mobility is not a choice. The unemployment insurance system, which was introduced during the 1930s, is essentially the same now as it was then. Currently, an out-of-work person who qualifies for unemployment insurance receives a check from the government that covers part of his previous salary. What is striking about the system is that it does not provide any incentive for unemployed workers to look for jobs in places with better labor markets. If anything, it discourages mobility from high-unemployment areas to low-unemployment ones, because it does not compensate for the difference in cost of living. If you are living off an unemployment check in Flint, you do not have a lot of incentives to move to Austin to look for a new job, because your housing expenses would double but your check would still reflect the cost of living in Flint.

The unemployment insurance system should be adjusted to reflect the vast and growing differences in economic fortunes among American cities. Unemployed people living in areas with above-average unemployment rates should receive part of their unemployment insurance check in the form of a mobility voucher that would cover some of the costs of moving to a different area. In other words, instead of encouraging out-of-work residents to remain in Flint, the federal government could help them relocate to Texas (or wherever they might choose to go) with financial support that covers a portion of their moving expenses. This would help those who would like to move but are stuck because they lack cash.

 Remarkably, this policy would also help those who are not willing to move. The reason is simple, although not widely recognized. If there are one thousand unemployed workers looking for jobs in a city where there are only one hundred job openings, the probability of each worker finding a job is one in ten. But if five hundred of these unemployed workers are encouraged to relocate by a mobility voucher, the probability that each of the remaining workers finds a job is doubled. In a climate of high unemployment, the fewer people like you who are looking for a job, the better your chances of finding one. This points to a surprising conclusion: unemployed workers who stay in a local labor market with high unemployment effectively impose a cost, or negative externality, on everyone else in that market, while workers who move away generate a positive externality. A mobility voucher is a way to deal with this. By increasing the number of workers who are willing to relocate, the voucher benefits both those who move, who end up with better jobs elsewhere, and those who stay, who end up with a better chance of finding a job. (Of course, this only works for the nation as a whole if the externality created by an unemployed worker is larger in cities with high unemployment than in cities with low unemployment—a reasonable assumption. Otherwise, mobility vouchers would simply shift the problem around, with no real benefit for total unemployment.)

In practice, a mobility voucher could take the form of an additional payment over and above the current unemployment insurance payment for those who move out of areas with above-average unemployment. Or it could come out of the current unemployment insurance payment, in the form of lower benefits for those who stay (with exceptions for those with health conditions or family constraints). The first case is a subsidy for those who move; the second is a tax on those who stay. If people cannot move because they don’t have savings and/or they have limited access to credit, the effect on their mobility is likely to be larger with the first type of voucher. A combination of the two approaches is also possible.

 This idea is not completely new. The government already provides a limited relocation allowance as part of Trade Adjustment Assistance, an obscure federal aid program that helps workers who have lost their jobs as a result of foreign trade. It is time to extend the allowance to include all workers receiving unemployment insurance.

In 1968 the Harvard economist John F. Kain proposed the theory of “spatial mismatch.” Poor people and minorities, he argued, face a structural disadvantage in the labor market because of the geographical mismatch between the location of housing and the location of jobs within each city. His basic idea was that the poor tend to be concentrated in the urban core of American cities, far from many suitable jobs. Not only do the poor face higher commuting costs, but because they live farther from potential employers, they also have less information about job openings, and this further depresses their employment opportunities. Kain argued that this geographical dislocation, combined with lower car ownership rates and lack of efficient public transit, results in higher unemployment rates. The sociologist William Julius Wilson embraced the notion of spatial mismatch in his influential book The Truly Disadvantaged, which highlighted the role of mismatch as one of the root causes of racial differences in the United States. Effectively, the spatial mismatch theory attributes economic inequality in part to the patterns of residential segregation within each city.

While historically such differences may have played a role, today it is differences across cities that are more likely to be the source of mismatch. The divide between well-educated workers with high-paying, secure jobs and less educated workers with low-paying jobs is connected to the geographical divide between thriving cities and struggling ones. In the debate over inequality in America, people often overlook this aspect. As the gulf between the labor markets in American cities grows, the lower propensity of less skilled workers to move becomes more and more costly.

 While the high mobility of well-educated Americans tends to be good for their careers, it presents state governments with a big challenge. By funding local universities and colleges, states heavily subsidize the higher education of their residents in the hope of fostering economic growth at the local level. In the United States, the current subsidy to students at public universities is on the order of 80 percent. As we saw, the overall level of human capital in an area is one of the most important drivers of local prosperity. State legislatures’ support for higher education is based on the hope that it will raise labor productivity and attract innovative businesses. However, the fact that college-educated Americans are so mobile makes the states’ efforts less effective.

A team of University of Michigan economists led by John Bound has found that the number of degrees conferred by local colleges and universities has only a modest effect on the number of university-educated workers within the state. States like Michigan and Ohio, with world-class systems of public higher education, struggle to retain many of their college graduates, who are more drawn to opportunities in California and New York. For the average recipients of bachelor’s degrees, Bound and his coauthors found only a weak link between the number of students who graduated from a state university and the number who ended up staying in that state. For recipients of M.D. degrees, they found no connection whatsoever: the number of doctors who stayed in Michigan had nothing to do with the number of doctors produced by the University of Michigan. Because of the high mobility of college graduates, the Michigan economists concluded that states have limited power to influence the skill levels of their workforces in a meaningful way by investing in higher education. The pull of innovation hubs dwarfs their efforts. This is great news for the cities that attract the college graduates—these cities effectively receive free human capital paid for by someone else. But it significantly limits the ability of struggling states to build a sustainable base by investing in higher education. Bound’s finding also has interesting implications for educational policy. It suggests that the financing of public colleges and universities should not be left solely to states. Given that the social benefit of investment in higher education is not contained within the borders of a state, an efficient educational policy is one in which the federal government plays a role in supporting part of this investment.

We now turn to another important aspect of Americans’ mobility: its relation to real estate prices. We have seen that there are large and growing differences in wages among American cities. One of the primary reasons that people aren’t moving en masse to San Francisco or Boston, despite the promise of higher wages, is that these cities are very expensive to live in. How is cost of living affecting the Great Divergence?