Tuesday, March 1, 2011

City-size and inequality

Are larger cities more unequal? Richard Florida points to an interesting paper by Nathaniel Baum-Snow and Ronni Pavan who investigated the effects of city size on wages (controlling for skill, industry etc) across the smallest rural areas to the biggest urban centers in the US between 1979-2004. They write,

"We find that one-quarter to one-third of the overall increase in hourly wage inequality in the United States from 1979 to 2007 is explained by city size independent of observable skill. While this influence has occurred throughout the wage distribution, the fraction of the increase in the lower half of the wage distribution explained by city size is at least 50% larger than that in the upper half of the wage distribution. More rapid growth in within skill group inequality in larger cities has been by far the most important force driving these city size specific patterns in the data. Differences in the industrial composition of cities of different sizes explain 19 to 32 percent of this city size effect."

In the chart above, the X axis is based on city or metro size (ranging from rural areas indicated by a 0 to the largest metropolitan regions) and the Y axis shows the level of inequality. The green line is for 1979, orange for 1989, magenta for 1999, and blue for 2004-07.

In 1979, the line was relatively flat, indicating that inequality was relatively the same regardless of whether you lived in a rural community, small city, or large metro. However, the slope gets steeper with each passing decade, indicating widening inequality with city size. City size "alone accounts for roughly 25 to 35 percent of the total increase economic inequality over this period over and above the role of effects of skills, human capital, industry composition and other factors". And compared to wage distribution at the top, city size explains 50 percent more of the increase in inequality for the low wage earners.

Examining the reasons for this trend, Richard Florida points to the growing advantages of geographic clustering or agglomeration for modern economic activity,

"The larger and more populous a city or region, the more likely it is to have the human capital and economic ecosystems required to support the most advanced — and hence the highest-paying — technologies and industries. Bigger cities attract more innovators, more entrepreneurs, and more highly skilled and ambitious people in general, and provide a fluid environment where these individuals can combine and recombine their skills. Big cities also generate powerful economies of scale and scope, resulting in higher rates of innovation, new firm formation, and productivity. They attract better-educated, better-trained, more-experienced workers, driving up wages.

At other side of the spectrum, manufacturing, which once clustered in and around large cities and metros, has shifted to less expensive suburban, exurban, and off-shore locations. And large cities have become home to a large and growing contingent of lower-skill, lower pay service jobs – from childcare and food preparation to retail sales and personal services. Taken together these factors have in effect divided or bifurcated the labor market in big cities into highly paid 'creators' and much lower-paid 'servers'."

In other words, despite offering better environment, opportunities and wages for less-advantaged and lower-skilled workers, than smaller cities, bigger cities exhibit much higher income inequality.

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