The larger the city, the larger
the gap between rich and poor
By City Mayors’ Special North America Correspondent

29 May 2011: The largest cities in the United States are generally considered to be at the vanguard of social and economic progress. For example, Pricewaterhouse Coopers’ 2011 Cities of Opportunity report on the world’s top cities calls New York, Chicago, and Los Angeles “vibrant engines of the global economy.” However, city size in the US is also directly related to income inequality according to another recent study — the larger the city, the larger the income gap between rich and poor residents.

Income inequality has been rising in the United States since the 1970s and is now the highest in the Western world. The reasons include tax policies which favor the wealthy, government retreat from social programs for the poor, a minimum wage that has not kept pace with inflation, declining union memberships, an influx of low-skilled workers from poorer nations, and the shift from a manufacturing economy to lower-paying service jobs.

The study controlled for these factors and found that the unique economies of larger cities also contribute to income inequality.

“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,” says Ronni Pavan of the University of Rochester who co-authored the study, Inequality and City Size, with Nathanial Baum-Snow of Brown University.

Big city economies
The study analyzed thirty years’ of census data and found that America’s largest cities experience the greatest extremes in incomes, while mid-size cities have relatively less wage inequality and rural areas the least.

Big businesses tend to be headquartered in big cities. The larger the city, the more corporate headquarters are located there — and the most Chief Executive Officers. The typical CEO in the US earns 300 times more than the average worker or 10 times more than in the 1970s, the report notes, and this accounts for most of the wage gap.

High CEO salaries are only the most dramatic manifestation of a dynamic in big city economies — what the authors call an “agglomeration” effect — that drives up both wages and inequality.

Large cities, with their access to global capital, are able to support advanced technologies and industries in ways that smaller communities cannot. The study found that the industrial composition of large cities changed much more rapidly towards innovation- and technology-based jobs than the economies of small areas over the past 30 years. The larger cities attract workers with higher skills, which leads to fatter paychecks for workers at all levels — especially at the top — which attract more people seeking opportunity.

The study controlled for the clustering of highly-educated and highly-skilled workers in cities and still found that one-third of the urban wage premium can be attributed to the agglomeration effect. Workers in big cities are exposed to innovation more rapidly than in smaller areas and businesses can tap into financial markets more readily — a powerful combination for increasing productivity.

Unfortunately, not everyone who lives in a big city shares in the economic benefits. While cities account for an upward pressure on all wages, many entry-level jobs have disappeared entirely. “The bottom has fallen out of lower end jobs, especially in bigger cities,” says Baum-Snow.

Cities as predictors
In social science studies over the past few decades, income inequality has been found to be a predictor of poverty, child welfare, health status, violent crime, and mortality. Yet, researchers have struggled to unravel the paradox between high and growing income inequality in the US and, until the 2008 housing crisis, a booming economy.

As this study quantifies, cities themselves provide different returns to human capital, just as they do to economic capital. In the United States, at least, city size can be used to predict income inequality.

Reference: Inequality and City Size, October 2010