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The best cure for wage stagnation nobody in Washington is talking about

If you build it, wages will rise
If you build it, wages will rise
Christopher Furlong/Getty Images

Both Josh Marshall and David Leonhardt have written recent columns about the idea that wage stagnation poses a particular political problem for Democrats — a problem that Democrats don't have a clear answer for. Ezra Klein has some doubts that this really explains much about the 2014 election. Where everyone seems to agree, however, is that it's a huge substantive problem — and one where Democrats tend to offer solutions that are rather long-term in nature.

A great pre-school program, for example, might do amazing things for the country. But it would take over twenty years for the kids in the program to grow up and enter the workforce in a real way where the economic benefits could show up. So here's an idea that should boost wages in both the short- and medium-terms as well as having long run benefits — liberalize land-use rules to allow for denser construction in the country's most expensive suburbs and cities.

Shortest-term benefit: new construction jobs

The short-term wage boost would come from the construction itself. In places where prices are very high — places like San Mateo County, Brooklyn and Long Island, the suburbs west of Boston, and all points north and west of the White House in the Washington DC area — it would be extremely profitable to construct new houses if that were allowed. This would mostly mean replacing detached single-family houses on large suburban lots with townhouses or low-rise apartment buildings, but would also entail replacing some rowhouses and low-rise structures with high-rise towers. The building boom would generate many jobs in the building trades sector, an industry where wages are generally much higher than the pay in the kind of retail and food service jobs that the economy has mostly added since the recession.

Even relatively lowly "construction laborers" earn about twice the pay granted to food prep and service workers, and building trades professionals with more specialized skills earn far more than that.

Medium-term benefit: higher real wages

(Scott Olson/Getty)

The kind of wages that matter are inflation-adjusted wages — wages that account for increases (or decreases) in the cost of living. An accelerated pace of new construction would moderate the tendency of living costs to rise rapidly in coastal metropolitan areas. It would also increase the quantity of people able to take advantage of the relatively high nominal wages that exist in these same areas.

In other words, waitresses in Wellesley would see their cost of living rise more slowly — and thus their real wages rise more rapidly — in the world with more construction. At the same time, the greater volume of housing would allow more residents of low-income states like West Virginia and Idaho to relocate to the more prosperous economies of California and Maryland. Economists Enrico Moretti and Chang-Thai Hsieh estimate that the static inefficiencies associated with people's inability to move to prosperity are costing hundreds of billions of dollars in lost income.

Long-term benefit: more innovation and productivity

The average population density of the United States would be unaffected by changes in housing policy. But zoning reform would lead a larger share of the population to reside in the country's densest areas. Studies show that increasing weighted density in this manner increases labor productivity, which is one of the main drivers of long-term wage growth.

Even more intriguingly, research by Wei Pan and Alex Pentland indicates that urban density increases innovation by increasing the frequency of face-to-face contacts. That means that in addition to the short-term wage boost of construction jobs and the medium-term wage boost of cheaper housing, a shift to more Americans living in denser places would increase the economy's long-term potential.

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