Brickonomics

There’s evidence that relative low income can lower subjective well-being: people feel worse when those around them earn more. But can earning relatively less make you objectively worse off, even if your own income doesn’t fall?

Apparently so. In a great bit of research, Janna Matlick and Jacob Vigdor find evidence that the increasing incomes of others can raise the price we pay for housing, leading to more income spent on housing or overcrowding. Especially in tight housing markets, like we have in many parts of the UK, “the poor do worse when the rich get richer”:

Do rising tides lift all boats? If raising the income of the wealthy increases the prices that the poor must pay for certain necessities, then it becomes more difficult to argue in favor of policies that exacerbate inequality on the grounds that they at least do not lower the incomes of the poor …

In the end, the evidence on this question is mixed, and it seems relatively clear that the answer depends critically on the elasticity of housing supply. In this sense, the study of demandside determinants of housing affordability problems should not be conducted in isolation from study of the supply side. In the United States, tight housing markets tend to be those where incomes are rising rapidly at the high end of the distribution, while incomes at the low end trend upward only slowly if at all. In these areas, the poor have experienced greater crowding, and there is at least some evidence that their expenditures on housing increase as well, though not in all specifications …

Do price effects negate the impact of “trickle-down” effects? The answer appears to be “sometimes.” The key to making rising tides lift all boats appears to be ensuring that there are more than enough boats to go around.

What this paper doesn’t cover is the further effect of higher house prices on inequality: in a rising market, those who could afford to buy enjoy windfall gains which they can use to help their children buy when the time comes, distorting the market further and leaving those who couldn’t afford to buy in the first place (and their children) even further behind. This effect is already quite marked in Britain.