Can influx of college grads cause spike in city housing costs, widening class divide?

July 26, 2018

By Matthew Kredell

USC Price Professor and Lusk Center Director Richard Green (Photo by Tom Queally)

An influx of college graduates in a city tends to increase wages for workers of all levels. But research from USC Price School of Public Policy Professor Richard Green, who directs the Lusk Center for Real Estate, shows that the resulting increase in housing costs offsets the higher earnings for low-skilled workers.

“Wage Trickle Down vs. Rent Trickle Down: How does increase in college graduates affect wages and rents,” a working paper published by the USC Lusk Center, indicates that an increased college share disproportionately favors the more educated residents — a result that has important implications for urban inequality.

“For the last 25 years, there’s been an evolution of wages and rents in cities and how they influence people differently at various education levels,” Green said. “If a lot of college graduates move into your city, and you’re a college-educated person yourself, wages go up to cover increased housing costs. But, if you’re at a lower level of education, housing costs go up more than income level, and the lower the education the bigger that gap is.”

Serving as a co-author on the paper was Jung Hyun Choi, who completed a Ph.D. in Public Policy and Management from USC Price in 2015 and went on to be postdoctoral scholar at the USC Sol Price Center for Social Innovation before joining the Urban Institute.

Increased wages negated by increased rents

Examining data from the Panel Study of Income Dynamics spanning 1980 to 2013, the authors track the impact of college graduates on wages and rents across U.S. metro areas. The paper is the first to take into account individual fixed effects for each educational attainment group.

“The world has changed from one where, 30 years ago, U.S. cities seemed to be converging, becoming more alike economically,” Green said. “Now they are diverging, becoming less alike economically, and the driver is that high-skilled cities are drawing high-skilled people from low-skilled cities, so there’s a bigger difference in skill levels between cities.”

The paper illustrates how a 1 percent increase in the share of college graduates leads to a 1.4 percent increase in wages. That wage increase varies across education levels, at 1.7 percent for college graduates and 0.7 percent for people without a high school degree.

However, household welfare does not depend only on income, but also cost of living. The same 1 percent increase in college graduates leads to a 2.5 percent increase in cost of rent. For the less educated, higher housing costs negate the wage increase.

Local impact

The findings suggest that policymakers need to consider the changes occurring both in the labor and housing markets from rising college share.

When taking into account the changes in housing cost and housing wealth, the welfare gap between the skilled and unskilled labor force further widens. This impact is being felt locally.

“In Los Angeles, we’re seeing people without college degrees moving out while people with college degrees are moving in,” Green said. “It’s consistent with what we’re seeing in California, where it’s ceasing to be a middle-class state.”

Green and Choi are currently working on another, related paper exploring one benefit of being low-skilled workers in a high-skilled city, namely that their children are more likely to finish high school and college.