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Title: A Tale of Two Tails: Wage Inequality and City Size

Citation Type: Miscellaneous

Publication Year: 2015

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Abstract: This paper studies how wage inequality within cities relates to the size of the city. We first document that in the United States, larger cities are not always more unequal: the wage gaps between the top and the median earners usually increase with the city size, while the gaps between the median and the bottom earners shrink with city size. We then develop a competitive spatial equilibrium model to rationalize this empirical pattern. In the model heterogeneous individuals sort into entrepreneurs or workers in different industries and cities. Top inequality is higher in larger cities, because entrepreneurs benefit dis-proportionally more than workers in larger cities as a result of agglomeration effects and market size. At the lower tail, our models links wage inequality to the spatial variations of inter-industry wage premium. Bottom inequality shrinks in larger cities because the wage rate in low-paying industries increase faster with respect to city size to allow for the low-income workers to overcome the higher living costs in larger cities. Our theoretical predictions on inter-industry wage premium are supported by empirical tests using the U.S. data.

Url: http://www.lin-ma.com/files/spatial_wage_inequality_ma_tang.pdf

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Authors: Ma, Lin; Tang, Yang

Publisher: National University of Singapore

Data Collections: IPUMS USA

Topics: Labor Force and Occupational Structure, Other

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