Abstract
Housing expenditure shares decline with income. A household’s skill level determines its income, and therefore its housing expenditure share, its sensitivity to housing costs and its preferences over different locations. The result is spatial sorting driven by differences in cost-of-living between skill groups. Increases in the aggregate skill premium amplify these differences and intensify sorting. To quantify this mechanism, we augment a standard quantitative spatial model with flexible nonhomothetic preferences, disciplining the strength of the housing demand channel using consumption microdata. We find that the rising skill premium caused 23% of the increase in spatial sorting by skill since 1980.
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