Academic journal article Federal Reserve Bank of New York Economic Policy Review

Earning Inequality and Central-City Development

Academic journal article Federal Reserve Bank of New York Economic Policy Review

Earning Inequality and Central-City Development

Article excerpt


Many papers have shown that U.S. earnings inequality increased substantially from about 1980 to around 1996.1 Recent and careful studies agree that a basic explanation for increased earnings inequality is the rising returns to human capital resulting from new technology. These rising returns have meant that the relative earnings of some of the best educated, and thus best paid, workers have increased. Inequality has risen while the economy has grown with unusual stability (at least after the 1980-82 cycle) and while substantial growth has occurred in the fraction of adults who are employed. Government data indicate that the earnings of low-income and historically disadvantaged workers rose faster in 1997 and 1998 than those of other workers. The Economic Report of the President (U.S. Council of Economic Advisers 1999) attributes the recent trend reversal to extreme tightness in the labor markets. Whether this reversal will continue if labor markets slacken seems doubtful if indeed the underlying cause of growing earnings inequality has been the rising returns to human capital.

It is worth mentioning that income inequality certainly has increased more than earnings inequality. Returns to corporate equities have averaged nearly 20 percent per year during the 1990s. Although more than a third of adult Americans now own corporate equities (including those owned through pension plans), most are still owned by people in the upper quarter of the income distribution. The distribution of physical capital ownership has been more unequal than that of human capital ownership since estimates have been available, and Heckman et al. (1998) provide evidence that rising returns to human capital have induced students to stay in school longer. However, the ratio of stock capitalization to GDP has nearly tripled since the 1980s. The result must have been a rising share of property income in total income (see Hale ). (Of course, capital gains must be included in income.) Although earnings inequality has increased in a few other countries more than in the United States, it is almost certain that when income inequality has increased more here than elsewhere it is because of the astounding performance of U.S. equities during the 1990s.

Thus, the facts are clear: earnings inequality has increased for close to twenty years-until, perhaps, a temporary reversal occurred starting in 1997-and income inequality has almost certainly increased more than earnings inequality. Earnings inequality has increased for a sound economic reason: rising returns to human capital at least in part have been related to technical change. It is patent that governments should encourage, not discourage, technology and the resulting high returns to human capital. How taxes should be levied on high earnings (relative to low earnings) and on earned income (relative to property income) is beyond the scope of this paper. But research during the last decade or two should have convinced everyone that all taxes affect economic behavior.


Everyone knows that U.S. metropolitan areas have suburbanized massively since World War II. In fact, during most of the last century and in every metropolitan area, suburbanization has increased in every part of the world that has been studied (see Cheshire forthcoming and White). Although residences are more suburbanized than businesses, both sectors have suburbanized rapidly and substantially.

The causes of suburbanization have been studied extensively. Agreement is widespread on the major causes, but not on their relative importance (see Mieszkowski and Mills 1993]). First, there is metropolitan growth: large metropolitan areas are more suburbanized than small ones. Second, there are high and rising incomes: high-income metropolitan areas are more suburbanized than low-income metropolitan areas, and high-income residents are more suburbanized than low-income residents, at least in the United States and in the few metropolitan areas elsewhere for which requisite data are available. …

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