Inequality and City Size

Abstract

Between 1979 and 2007 a strong positive monotonic relationship between wage inequality and city size has developed. This paper investigates the links between this emergent city size inequality premium and the contemporaneous nationwide increase in wage inequality. After controlling for the skill composition of the workforce across cities of different sizes, we show that at least 23 percent of the overall increase in the variance of log hourly wages in the United States from 1979 to 2007 is explained by the more rapid growth in the variance of log wages in larger locations relative to smaller locations. This influence occurred throughout the wage distribution and was most prevalent during the 1990s. 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 up to one-third of this city size effect. These results suggest an important role for agglomeration economies in generating changes in the wage structure during the study period.

Figure 1

Log Hourly Wage Growth by Percentile, 1979–2007 Notes: The sample includes all full-time white male workers ages 25–54 working at least 40 weeks in the listed years. Data is from the census 5% PUMS in 1980, 1990 and 2000 and 1% American Community Surveys (ACS) in 2005, 2006 and 2007. Hourly wages are deflated by the CPI-U and calculated as the logarithm of wage and salary income divided by the product of weeks worked and usual hours worked per week. Observations with imputed skills, labor supply or wages, the self-employed and those who earned less than 75% of the federal minimum wage in the earnings year are excluded from the sample. Calculations are weighted by sampling weights except for those using the 1980 census which is an unweighted sample. Data listed as being for 2007 actually represents data from full years ending in 2005, 2006 or 2007 with distributions from each year recentered to have a common median.

Figure 2

Wage Inequality by City Size Notes: See the notes to Figure 1 for a description of the sample. Size 0 corresponds to non-MSA locations. Sizes 1–10 correspond to ten-percentile bins from the year 2000 MSA population size distribution.

Figure 3

Relative Skill Levels and Wages by City Size Over Time Notes: Panel A shows the fraction of total hours worked by all men and women with at least a college degree in each location type in each year. Panel B shows relative mean log wages for white men ages 25–54 working full time and full year with versus without college degrees.