How Cities Can Effectively Deal With Income Inequality

http://www.citylab.com/politics/2015/01/the-connection-between-successful-cities-and-inequality/384243/

Capital in the Twenty-First Century cover
en.wikipedia.org

Hello Everyone:

A joyous Monday to you all.  We are celebrating 25,151 page views.  Woo Hoo.  This totally unbelievable.  In just a little over two years we have gone from a boring little blog to something that found and continues to find an audience around the world.  I cannot do this without you and I am eternally grateful for your continued readership.  My deepest gratitude to you all.

Today, sort of going to continue on a subject we talked about on Wednesday January 28, income inequality.  Last Wednesday we looked at Richard Florida's article for City Lab about how neighborhoods affect your income.  Today, we are going to look at another article from the fertile fingertips of Mr. Florida titled, "The Connection Between Successful Cities and Inequality."  Mr. Florida discuss how new research demonstrates that the largest American cities would be better off if they focused on workers at the bottom of the economic scale.

French economist Thomas Piketty's hefty book Capital in the Twenty-First Century made inequality one of the most used words in 2014 by arguing that "it's a basic outcome of modern capitalism."  The New York Times commentary section, "The Upshot," announced "that inequality has been the theme du jour at the American Economic Association's annual meeting."  Mr. Florida observes, "inequality has become an increasingly dominant feature of U.S. cities."  The 2014 U.S. Conference of Mayors report (http://www.usmayors.org/pressrelease/uploads/2014/1211-report-hh.pdf) revealed that income inequality increased in more than two-thirds of American metropolitan areas between 2005 and 2012. In the interim, the wage gap nearly doubled from 12 percent to 23 percent  between 2002 and 2012. Case in point, New York City's Gini coefficient-"the measure of the extent to which the distribution of income or consumption expenditure among individuals or households within an economy deviates from a perfectly equal distribution" (http://www.data.worldbank.og/indicator/SI.POV.GINI)-was equal to Swaziland; Chicago's was nearly on par with El Salvador; San Francisco's Gini coefficient resembled that of Madagascar.

"End income disparity"
citylab.com

While all this anecdotal information may sound grim, Mr. Florida reports on "A pair of new economic studies [that] take on the rising challenge of urban inequality in new and important way."  The first is a study conducted by Jung Hyun Choi and Richard K. Green et al. of my alma mater the University of Southern California and the second by Nathaniel Baum-Snow of Brown University, Matthew Freedman of Drexel University, and Ronni Pavan of Royal Holloway-University of London.

The Choi-Green study, titled "Financial Crisis and Increase in Income Inequality Across Cities," (appam.confex.com), focuses on metropolitan area-level inequality through the top tenth percentiles of the American income

Income Level of Top and Bottom 10th Percentiles
citylab.com

distribution between 1980 and 2011.  This measure, an alternative to the Gini coefficient,
allowed the researchers to determine whether changes in inequality levels were caused by
shifts in the top or bottom percents of income distribution.  The graph on the left composes the first part of the authors's analysis, demonstrates that "while absolute changes in the level of income for the top 10th percentile have been relatively volatile in response to broader economic trends, the incomes of those in the bottom 10th percentile have been flat." To understand why this is the case, Messrs. Choi and Green used regression analyses to study the relationship between income inequality throughout American metropolitan areas and their character defining features such as: "...race, industry, skill, job market conditions, residential mobility and unionization."

In his own analyses of the findings, Richard Florida found that Messrs. Choi and Green's results concurred with his own conclusions.  The conclusions demonstrated that levels of income inequality are greater in urban areas with a negative labor market condition condition, better educated populations, and greater industrialization specialization, i.e. "skills clustering."  Between 1980 and 2000, the authors also discovered that "highly skilled labor was positively associated with changes in income inequality, though that relationship reversed itself between 2000 and 2011.  In the pre-recession housing boom, the authors's resulted demonstrated that urban areas with "...greater number of Hispanic and Asian households had greater increases in income levels in the bottom 10th percentiles, while the period after the bust saw real income drop in the bottom 10th percentile in areas with greater proportions of black households." Also, Messrs. Choi and Green found that unionization in metropolitan areas concurred with reduced income inequality.

Tech culture and rising income inequality
citylab.com

The second study, written by Nathaniel Baum-Snow, Matthew Freedman, and Ronni Pavan, titled "Why Has Urban Inequality Increased?" (econ.brown,edu) hones in on larger cites to establish how a number of determinants have affected increases in wage inequality from 1987 to 2007.  This paper is a follow up to previous work, which concluded that the size of a city alone "...accounts for about 25 to 35 percent of the total increase in income inequality between 1979 and 2007, beating out the effects of skills, human capital and industry composition."

The researchers used U.S. Census information to take a detailed look at how "...the clustering of manufacturing capital and changes in the relative supply of skilled labor affect large-scale wage inequality."  They evaluated the connections between the workers's hourly wages and variables such as: age, gender, race, occupation, place of residence, immigration status, and skill level.

Income inequality handbill
nextcity.org

Nathaniel Baum-Snow, Matthew Freedman, and Ronni Pavan revealed that "...high-skill clustering is associated with higher returns and wages for high-skilled workers..."  However, they add this one caveat, wage gaps expanded and there were less employment opportunities for unskilled workers in large cities. Rather, the findings suggest that city or metropolitan size accounts for one-third of the increase in national wage inequality since 1980.  The blame lies at the feet of the clustering that drives the engine of urban growth.  Quoting Baum-Snow et al, Mr. Florida writes, "an important fraction of the nationwide increase in the skill premium since 1980 can...be traced back to increases in the skill bias of agglomeration economies."  The authors note the growing link between high-skill work and city size in the nineties, a period of wage stability in context to city size, is further proof of the importance of city in making and perpetuation clustered economies.

Apartment building with Rocinha  shantytown in the background
Rio de Janeiro, Brasil
opinionator.blogs.nytimes.com

The takeaway here is income inequality is not an occasional occurrence in urban economies.  It is a fundamental part of the urban economies, the result of the same essential clustering forces that is at the foundation of metropolitan regions's rise as centers for innovation, startups, and economic growth.  In short, "the exact same phenomenon of skill clustering that has made tech hubs like San Francisco, New York, and Boston such successes has contributed to the rise of inequality, the growing gap between the haves and have-nots.

This creates a difficult situation for policymakers who may be tempted by political trends to craft measures that would impeded economic growth.  However, it is hard to see the logic in undermining economic growth in order to mitigate income inequality.  Rather, Richard Florida suggests, "Urban leaders would be much better off focusing on policies that boost the conditions of people at the bottom of the economic ladder, enhancing skills, upgrading low-end service jobs, and raising the minimum wage, as well as increasing the the supply of housing, particularly affordable housing." The key to battling income inequality is bring together the new urban growth in ways that make a more inclusive city.