For income gap, (city) size matters

U. ROCHESTER (US) — The unique economies of larger cities in the U.S. are partially responsible for the gap between rich and poor, according to a new study.

“Our results show that overall up to one-third of the growth in the wage gap between the rich and the poor is driven by city size independent of workers’ skills,” says Ronni Pavan, assistant professor of economics at the University of Rochester.

U.S. Census data and American Community Surveys from 1980 to 2007 across the entire United States show that the larger the city, the wider the wage gap among its workers.

New York, Los Angeles, and Chicago, the nation’s largest cities, are home to the greatest extremes in incomes. Midsized cities experience relatively less wage inequality and rural areas the least.

The gap can be attributed to the rapid growth in wages within all skill levels, from high school dropouts to professionals. At the same time, the bottom has fallen out of the lower end jobs, especially in bigger cities, says Nathaniel Baum-Snow of Brown University.

“Something fundamental has changed in our economy, and it’s happening at the metropolitan level.”

While wages have always run higher in cities, prior to 1979, wage inequality was roughly equal regardless of where workers resided. Not so today. Now the local economy, specifically the size of the metropolitan area, predicts wage inequality.

“There is a lot of concern in general about the growing disparity between the highest and lowest paid workers,” Pavan says.

Today’s typical CEO’s brings home 300 times more than the average wage earner, 10 times more than in the 1970s, placing the United States last among Western industrialized nations for wage equality, according to the Central Intelligence Agency’s Gini index.

Income inequality continued to skyrocket after 2000, even as union strength remained steady during the last decade, says Baum-Snow. Likewise, the decline in the value of the minimum wage does not account for the tremendous growth in wage inequality among the upper half of the pay scale.

Large metropolitan areas have created “agglomeration” economies that have augmented productivity in dramatic ways, making workers more valuable and therefore able to command higher pay, says Pavan.

For example, populous regions have been able to support advanced technologies and industries that would be impractical or impossible in smaller communities and rural areas. Workers have more opportunities to learn advanced skills and are exposed to innovation more rapidly.

The graph tracks the income gap in different sized cities, with “0” representing rural areas and “10” the nation’s largest metropolitan regions. In 1979 (the green line), wage inequality was roughly equal regardless of where workers resided. Currently, the larger the city, the wider the wage gap among its workers. (Credit: U. Rochester)

As financial centers, larger cities also have easier and cheaper access to capital for bankrolling new ventures.

In fact, the study looked at the changing mix of industry in communities of different sizes and found that the industrial composition of large cities, which changed significantly over the three decades, accounted for up to one-third of the urban wage premium. By contrast, the economies of rural areas remained relatively static over the same period.

The researchers calculated what the growth in the wage gap would have been had cities mimicked the slower pace of technological change in rural areas and found nationwide rise in wage inequality “would have been significantly less rapid if such agglomeration economies did not exist.

Although college graduates do make up a higher percentage of workers in large cities, the authors found little evidence that migration to larger cities accounted for surging urban wages, discounting the theory that high urban wages are simply a reflection of the clustering of highly skilled people in a specific geographic region.

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