Big cities drive economy, but also worsening wage inequality

Illinois fares relatively well, but U.S. wage gap has widened since 1980

Workers in highly skilled positions in competitive, big-city environments are thriving, but also producing greater wage inequality. (Shutterstock)

Workers in highly skilled positions in competitive, big-city environments are thriving, but also producing greater wage inequality. (Shutterstock)

By Ted Cox

Big cities are driving the U.S. economy, but are also making matters worse on wage inequality, according to a new federal study.

The study released this month by Jaison Abel and Richard Dietz of the Federal Reserve Bank of New York asks the question, “Why Are Some Places So Much More Unequal Than Others?” What it finds is that wage inequality has worsened across the nation since 1980, but the trend has been pronounced in thriving big cities, driven by intense competition to hire skilled workers.

The study takes pains to point out that wage inequality — in this case, studying the difference between the top 10 percent of earners and the bottom 90 percent — is different from income inequality, which concerns a a more basic wealth gap between rich and poor.

It found a widening gap between the average salaries of those in the top 10 percent of wage earners and the rest of the workforce. Fairfield, Conn., led the nation in wage inequality in both 1980 and 2015, the most recent data available. But top salaries there were 5.6 times the average for the other 90 percent of workers in 1980, and are now 8.7 times the average salary for the bottom 90 percent.

“Wage inequality has increased in nearly every metropolitan area since the 1980s, though it has risen quite sharply in some parts of the country to particularly high levels,” the study stated. “Large urban areas such as New York City are now among the most unequal places, owing largely to strong demand for skill pushing up wages for those toward the top of the wage distribution.”

The study reflects and confirms other recent surveys finding that highly skilled workers and those educated at elite universities are driving the worsening income inequality, as they benefit from the competitive business environment to drive up their salaries far more than workers in other professions.

As major metro tech centers, New York City, Los Angeles, and San Francisco all placed in the top 15 for worst wage inequality. In fact, of the top dozen on the list (there was a four-way tie for ninth), half were California cities, including San Jose, Bakersfield, Santa Cruz, and the Oxnard-Thousand Oaks-Ventura area.

Illinois placed no towns in either the top 15 or the bottom 15. In fact, going back to 1980, only Champaign-Urbana made the top 15 nationally with the top 10 percent averaging salaries 4.5 times larger than the rest of the workforce — a figure that would now come close to placing it in the bottom 15.

In the most recent data, Illinois had a couple of towns with an inequality rating under 5, including Rockford. Much of the central and southern part of the state, including Metro East across from St. Louis, had ratings between 5 and 6. Only Chicago had a rating above 6, again reflecting the double-edge sword of increased competition driving both a thriving economy and higher salaries for specialists.

Again, however, that cut both ways and not necessarily in a good way. The study found that places where wage inequality was lowest also tended to be economic backwaters where there isn’t the same level of competition to hire and retain top workers.

“Many of the least unequal places,” it stated, “have struggled with weak economic conditions and sluggish demand for workers, resulting in lackluster wage growth across the board — particularly for middle- and lower-wage workers.

“The places where demand for skill has been strongest tend to be large urban areas with agglomeration economies and appeal for skilled workers,” the study concluded. “At the other end of the spectrum, many of the least unequal places in the country have struggled with weak economic conditions, resulting in sluggish demand for workers, particularly in regions where manufacturing jobs have plummeted over the past three decades. This weak demand has led to more subdued wage growth for workers toward the upper portions of the wage distribution, coupled with either a modest increase or a decrease in wages for those toward the middle and bottom of the wage distribution.”

The authors called their findings “an important first step to understanding the magnitude and sources of regional wage inequality.”