Economics

Housing shortage holding back social mobility, says new IEA report


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Christopher Snowdon writes for CapX

Economics

IEA Research feature in The Yorkshire Times

https://iea.org.uk/wp-content/uploads/2024/02/IEA-Discussion-Paper-122_Wealth-Generation_web.pdf
Britain’s restrictive planning system and occupational licensing rules hurt the worst-off.

  • House prices could be over one-third lower without restrictive planning rules.

  • Almost 1-in-5 British workers are required to get a licence to do a job, known as occupational licensing. This is up from 14% in 2008 and higher than in countries with high income mobility, such as Denmark (14%), Sweden (15%) and Finland (17%).

  • UK income mobility is “not exceptional in any way – neither good nor bad” in international comparisons but could be improved through economic liberalisation.


Britain’s poorest are being held back by restrictive planning laws and labour market regulations, according to new research from the free market think tank the Institute of Economic Affairs. Income mobility in Britain has fallen since the 1970s at the same time as housing and labour regulations have increased.

The authors, academics Dr Justin Callais and Dr Vincent Geloso, say that the inability to build homes near better paying jobs prevents social mobility. They cite US evidence that shows households could be hundreds of thousands of pounds better off over their lifetimes if they could move to areas that offer more job opportunities.

Planning restrictions disproportionately benefit existing wealthy homeowners, who can pass the gains of high house prices down to the next generation. These restrictions have also increased housing costs significantly. They cite research estimating that in the absence of regulatory barriers, house prices would have been 35% lower than they actually were in 2008*.

The authors say that Britain’s least well-off are held back by cumbersome requirements to get a licence for a growing number of jobs. They calculate that if Britain were to bring workplace occupational licensing regulation down to Danish levels, it could boost income mobility by up to 1.6%. Returning UK labour market regulations to 1990s levels, which would mean halving the number of occupations that require a licence, could boost income mobility by up to 3.1%.

The paper rejects the idea that increased government spending on welfare and education is the best way to improve social mobility. They highlight that more spending means higher taxation and lower growth, entrepreneurship and opportunity. Instead, Callais and Geloso demonstrate that removing legal hurdles to work is the most effective way to help the worst off in society.

The authors cite extensive evidence demonstrating a strong link between income mobility and economic freedom. “Limited business and land-use regulation, more flexible labour markets, fewer barriers to business formation, and more open trade can do more to boost income mobility than is commonly appreciated,” Callais and Geloso write.

Justin Callais, paper co-author and Assistant Professor of Economics and Finance, University of Louisiana at Lafayette, said:

“By focusing solely on inequality as the main cause of income mobility, we are missing out on an even more important factor: economic freedom. Economic freedom empowers individuals to excel in their unique strengths, unlocking a vast array of pathways to prosperity.

“Economic freedom has far fewer drawbacks than other proposed policies like tax and redistribution, which lowers the returns to productive activity. The British government would be wise to consider robust changes to its policies on occupational licensing and housing regulations in order to tackle income mobility.”

ENDS

Notes to Editors

Contact: [email protected] / 07763 365520

Read a copy of Wealth Generation: How to boost income mobility in the UK


  • *Hilber, C. A., & Vermeulen, W. (2016) The impact of supply constraints on house prices in England. The Economic Journal, 126(591), 358-405.

  • Absolute income mobility refers to increased living standards throughout a person’s lifetime. Relative or intergenerational income mobility is the difference between a person’s income and others (for example, their parents).

  • Economic freedom refers to limited government and regulation, safe and secure property rights, open trade and sound money.

  • Callais and Geloso have established a robust positive correlation between relative income mobility and economic freedom measures:




  • Callais and Geloso compare Canada’s most economically free province (Alberta) and the least economically free province (Quebec). It shows that one extra point of measured economic freedom was linked to a 2.1% increase in income for the poorest 10%. The impact of boosting economic freedom in the labour market was associated with a 3.7% income increase.




  • Callais and Geloso have found that occupational licensing rules are associated with lower levels of income mobility:




The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.




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