Growing Pains: The Link Between Increasing Wage Inequality and City Size

When Bill de Blasio rode a wave of popular support to a landslide victory in New York City’s 2013 mayoral election, he did so under a campaign pledge to reverse the trend of widening economic inequality that had turned New York into a so-called “Tale of Two Cities.” The issue of economic inequality has reached a level of salience in the public sphere that is difficult to ignore. Yet, as policymakers struggle to address concerns arising from widening economic gaps in the United States, there are areas in which the growth of inequality remains largely unexamined.

Several studies have noted a significant increase in wage inequality in the United States over the past few decades, pointing to a number of contributing factors that include the evolution of technical skills in the marketplace, the substantial decline in value of the minimum wage, and the declining rate of union membership. One area that has not been fully explored is what role, if any, the growth of American cities may play in the rise of wage inequality. Is there a connection between wage inequality and city growth, given the continued shift of the American population from rural areas to urban centers? And if so, what could be the determinants behind this phenomenon?

In “Inequality and City Size,” published in The Review of Economics and Statistics, researchers Nathaniel Baum-Snow and Ronni Pavan investigate the potential ties between the overall widening wage gap in America over the past three decades and the increase of city sizes in this same period. The researchers hypothesize that urban agglomeration economies—physical clusters of competing firms that operate in the same sector—are key to tracking the relationship between growing wage inequality and city size. Specifically, they posit that either these economies attract firms with increasing wage disparities to urban environments or the agglomerations are themselves drivers of wage inequality.

In order to test their theory, Baum-Snow and Pavan analyze data from the Census Public Use Microdata Five Percent Samples from 1980, 1990, and 2000, along with the 2005 through 2007 American Community Surveys. They note that while many studies on inequality in the United States rely on the Current Population Survey, their own methodology affords them optimal sample sizes and geographic details for their analysis. To control for factors such as discrimination, the researchers limit their analysis to white males from the ages of 25 to 54 who worked at least 40 weeks per year and 35 hours per week and who earned at least 75 percent of the federal minimum wage per year.

In their analysis, Baum-Snow and Pavan compare the actual trajectory of wage inequality with projected outcomes had there been no relationship with city size, using rural areas as the control group and different city size categories as treatment groups. These experiments yield crucial insights into the role that skill upgrading plays in the increasing wage inequality. Larger cities, where skilled workers abound, exhibit greater demand for skilled workers than for unskilled workers. This leads to skill upgrading, which is seen most noticeably in the technology industry, that in turn leads to within-skill-group inequality. It is this increase of wage inequality among workers in the same sector that accounts for most of the effect of city size on the nationwide growth of wage inequality; the researchers attribute to city size an estimated 23 percent of the growth in wage inequality between 1979 and 2007.

The findings also reveal a number of trends in the data related to rising wage inequality. From 1979 to 2007, the gap in overall hourly wages increased by 85 percent, the gap in wages between the 90^th and 50^th percentile earners increased 57 percent, and the gap in wages between the 50^th and 10^th percentile earners rose by 12 percent. The data indicate that the relationship between wage inequality and city size did not appear until wage inequality in general began to grow. There is also evidence that larger skilled labor demand in urban areas is partly responsible for this relationship, according to the authors.

Baum-Snow and Pavan demonstrate that the types of firms and workers that are located in larger cities experience growth rates of wage disparity that are greater than those in small cities. While this study indicates that there exists a greater demand for high skill levels in bigger cities, the researchers advise future studies to focus on the effect of increased wage inequality on inequality caused by changing levels of economic production in larger cities. The results of this line of research may provide new insights to better inform policymakers interested in reducing the continuing trend of economic inequality in the United States.

Article Source: Nathaniel Baum-Snow and Ronni Pavan, “Inequality and City Size,” The Review of Economics and Statistics 95, No. 5 (Dec 2013): 1535-48.

Feature Photo: cc/(RoseBadlani)