Full text of Economic Synopses : Local Income Inequality, No. 31
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Economic SYNOPSES short essays and reports on the economic issues of the day 2008 ■ Number 31 Local Income Inequality Rubén Hernández-Murillo lthough national income inequality is a subject of great governments to reduce inequality by redistributing wealth: As concern in the popular press and in political rhetoric, noted, the richer and highly skilled will move if returns to skill income inequality at the local level is more evident because decline. Communities with more generous redistributive policies, inequality tends to be much higher in densely populated areas; in the form of welfare programs, also affect the location patterns consequently, some economists focus their attention there. The of less skilled immigrants and will tend to attract more poor chart shows a correlation of 45 percent between county-level individuals. income inequality and population density for 2007. Differences in Glaeser, Resseger, and Tobio suggest that education policies local inequality reflect, for the most part, three important factors: to improve the skill levels of individuals at the bottom of the differences in the distribution of job skills, differences in the distribution might be more effective at reducing inequality than returns that individuals gain from their skills, and differences in redistributive policies. They warn, however, that changing the government policies. distribution of human capital would take several years, if not Economists Glaeser, Resseger, and Tobio find that almost one decades. More important, they note that because the United States half of the variation in income inequality across metropolitan has a decentralized schooling system, in which schools are run areas can be explained by differences in the distribution of skills.1 by local governments, attempts to equalize education opportunities across cities would require potentially difficult and costly They identify two reasons for this: First, particularly at the medium coordination between national and local governments. ■ and high skill levels, the differences in skills observed today can be explained largely by the historical patterns from several decades 1 Glaeser, Edward L.; Resseger, Matthew G. and Tobio, Kristina. “Urban Inequality.” ago; in other words, historical patterns of skill level are very perNBER Working Paper No. 14419, National Bureau of Economic Research, sistent. Second, where people choose to live, especially those with October 2008; http://papers.nber.org/papers/w14419. lower skill levels, affects the distribution of skills: For example, recent Hispanic immigrants have disproportionately lower skill levels than immigrants from other ethnic backgrounds and lower skill levels than immigrants from Income Inequality and Population Density in Counties previous decades. Historical patterns are also imporIncome Inequality (Gini index) tant in this case because many Hispanic immigrants often locate in the same areas of the country—those 0.60 geographically close to Latin America, such as California, Texas, and Florida. 0.55 Inequality across cities also reflects differences 0.50 in the returns to skill, although it is not clear why skill is rewarded more in some places than others. 0.45 One potential explanation is that densely populated Line of Best Fit areas generate human capital spillovers (i.e., the 0.40 sharing or passing on of skills) because of the concentration of skilled individuals working together, 0.35 which causes the returns to rise. Economists also 0.30 recognize that highly skilled individuals are sensitive –1.00 0.00 1.00 2.00 3.00 4.00 5.00 to differences in these returns and can easily migrate Population Density (in logs) to those places where their skills are valued more. NOTE: The Gini index ranges between 0 and 1 and indicates how unequal a distribution is relative to a distribution Differences in government policies also explain that is perfectly even. A larger index value indicates higher inequality. Population density is measured as the number of persons per acre and only counties with a population density of more than one person for every two acres are some of the variation in income inequality. However, included in the plot. the high mobility of more skilled, and consequently SOURCE: U.S. Census Bureau, 2007 American Community Survey. County acreage measures are from the 2000 Census. richer, individuals severely limits the ability of local A Views expressed do not necessarily reflect official positions of the Federal Reserve System. research.stlouisfed.org