Wednesday, January 28, 2015

What Does The Neighborhood Have To Do With Income?

"Welcome To Fishtown"
Philladelphia, Pennsylvania
Hello Everyone:

Here is an interesting question, does the neighborhood you live in affect your paycheck? Interesting question, that blogger had never considered until right this moment.  This is a subject that Richard Florida recently considered in his City Lab article "How Your Neighborhood Affects Your Paycheck."  Mr. Florida writes, "The part of town where you live-especially where you grew up-can profoundly affect lifetime earnings." It is not something that we readily think about [where we grew up] when planning a career but yours truly will venture a theory that the neighborhood you grew up in plays a strong part in the career choices available to you.

Tree line neighborhood in Portland, Oregon
Richard Florida starts off with a quote from economist Tim Harford recently published in the Financial Times, "[A] as I check off my list of privileges, I won't forget the biggest of them all: my passport."  Why is a passport such a big privilege in today's world?  In an increasingly tenuous world, where social and financial capital is clustered in specific places, "the country in which you're born obviously affect the opportunities you will be present with later in life."  We can further understand how place of birth affects what opportunities are afforded to you at the neighborhood level.  It sounds like an obvious thing, a person who grows up in an affluent neighborhood will be granted opportunities than someone who is raised in a less affluent or poor neighborhood.  The 2012 American Presidential election made this point abundantly clear.

Rudd's Trailer Park just off Jefferson Davis Highway
South Richmond, Virginia
Cities are not a single giant entity, they are a collection of neighborhoods.  Mr. Florida concedes the obvious, "And we know that the outcomes among children who grow up in poor neighborhoods, those with under-performing schools, under-prepared peers and less access to high-quality libraries or museums, are often very different than those who grow up in wealthier areas."  This schism can not only contribute to wage and income inequality, but also what Stanford University economist Rebecca Diamond refers to as "inequality of well-being."  "Inequality of well-being" describes neighborhoods that a greater percentage of high-skilled workers who not only have more money, but better amenities such as grocery stores and schools.  According to Ms. Diamond, the well-being inequality gap is "20 percent higher than what can be explained by the wage gap between college and high school grads."  This is something social scientists defined as a "neighborhood effect" and two recent studies illustrate how this works.

Fresh Meadow
Queens, New York
The first study was conducted by Princeton University sociologist Douglas Massey and Jonathan Rothwell, a Brookings Institute's Metropolitan Policy Program economist.  The study examined how where you live for the first sixteen years of your life affects future income between the age of 30 to 44.  (  The paper was published in Economic Geography used information from the Panel Study of Income Dynamic gathered by the University of Michigan's Institute for Social Research, which followed a national sampling of families and individuals since 1968.

There have been previous studies that accounted for the different ways in which parents have had a profound effect on the economic future of their children. Nevertheless, Messrs. Massey and Rothwell speculate that "the characteristics of neighborhoods have an effect on future earnings independent of the well-established roles of factors like parents' income or education."  Their results were startling.  Messrs. Massey and Rothwell found the neighborhood effect accounted for "50 to 66 percent of the effect of parental income."  They wrote, "growing up in a poor neighborhood would wipe out much of the advantage of growing up in a wealthy household."  Startling indeed.  They call this finding the "million dollar neighborhood effect," revealing that "lifetime earning are roughly $900,000 higher (or $730,000 net present value terms) for those who grow up in the richest 20 percent of neighborhoods than for those who grow up in the bottom 20 percent, even after corrected for parental income."  This results in as big a difference in the wage gap between high school-only graduates and college graduates, estimated by the Census Bureau to be about "$1 million dollars in lifetime earnings."

Predicted difference in lifetime earnings
 By neighborhood
This effect becomes more stark when Messrs. Massey and Rothwell take into account the cost of living.  There is more 'bang for the buck' in Des Moines than New York City.  Thus, the researchers built in a local price index, using residential rental prices and rolled the numbers back through their intergenerational mobility models. The results are presented in the chart on the left, from the Brookings Institute.

Richard Florida points out, "Of course, the neighborhood effect is also associated with a host of other variables, race chief among them."  The authors used two Census tract-based to indicated data points that determine the neighborhood effect based on race.  They found that both variables and specific neighborhood effect alone are significant predictors in future earnings.  However, they also found that the neighborhood effect is the clearest explanation of the three.  The authors note, "It thus appears that the lower intergenerational income mobility of African Americans can be explained by their disproportionate segregation in poor, disadvantaged areas."

Renovated brownstone
Bedford-Stuyvesant, Brooklyn
The second study was conducted by Richard Florida's colleagues at the Martin Prosperity Institute: Charlotta Mellander, Keving Stolarick, and José Lobo, which looks at how the location of a neighborhood affects income.  This paper looked " the effects of residential neighborhoods and workplace neighborhoods on individuals' incomes in Sweden between 2002 and 2011." Why Sweden between 2002 and 2011?  The Scandinavian country had "unusually detailed micro-data that enable the researchers to study the connections between, firms, neighborhoods and individual earnings over time in a systematic way."  The information included about 22 million observation of the ten-year time period.  (

King Street-Meeting Street corridor
Charleston, South Carolina
The study employed the idea of "neighborhood effect" somewhat differently: Whereas sociologists focused on the ways one's early neighborhood environment affected life outcomes, Ms. Mellander and her co-authors analyzed the was the locations where a person works and lives affect current incomes.  Vastly different.  The goal of their research was to, "examine which social community most affects an individual's productivity."  The models they used looked at effect of neighborhood location and workplace on the income of higher skill knowledge and creative workers and less-skilled blue collar and service workers, while controlling factors such as education and gender.

The big, somewhat obvious, takeaway: "Neighborhoods have a very different effect on the incomes of blue collar and service workers as compared to knowledge and creative workers."  Residential neighborhoods have a bigger impact on blue collar and service worker incomes.  The researchers suggested that "This...may be because these workers are more likely to 'network' with friends and neighbors to find good jobs."  Meanwhile, residential neighborhood locations has less of an effect on knowledge and creative workers, whose incomes are more affected by their workplaces.  Further, creatives and knowledge-based employee received an income boost from working in a creative cluster location, perhaps "because these clusters are also where 'they can change jobs frequently and where firms compete for some talent.

The two studies cited in this article sheds light on how the powerful role of neighborhoods affects income.  Most of the findings seem obvious but what is groundbreaking is that the research is crucial to understanding why certain locations experience growth while others do not and how segregation and other divides can resonate in the future.

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