How Valuing Productivity, Not Profession, Could Reduce U.S. Inequality

This is the second segment of a two-part Q&A with economist Jonathan Rothwell. Read the first part here.

In his new book A Republic of Equals, Gallup senior economist Jonathan Rothwell traces the forces driving the dramatic rise in inequality in the United States. In the first half of our conversation, we talked about how elite professions in the United States perpetuate inequality, both now and historically, and how this contributes to inequality and low productivity in the U.S. economy.

In this part of our interview, Rothwell addresses how unequal educational opportunities in the United States contribute to inequality, and he explains how a more just society would reward people for productive or otherwise socially valuable contributions while also taking care of the poor and those unable to work. Our conversation has been condensed and edited.

In the book, you revisit territory associated with the controversial 1994 book The Bell Curve. You parse the connections or lack thereof between IQ or intelligence, education, skills, opportunity and economic outcomes. Tell us about this.

In The Bell Curve, Richard Herrnstein and Charles Murray argued that IQ is important to many outcomes in life, that IQ is mostly determined by genes, and that racial differences in social status may be at least partly genetic. I criticize these views in the book in some detail, because I think they are untrue—especially the last two points—and have been detrimental politically and culturally.

We now know that IQ—which basically means how people perform on tests of literacy and numeracy—is relevant to the labor market and the sorts of occupations people enter. But we also know that other skills are roughly as important as IQ to the labor market. These include things like conscientiousness, extroversion, integrity, and emotional stability.

As for the genetic component of IQ, modern scholarship and actual analysis of genes has resulted in greater appreciation for the importance of environmental factors, which are now deemed the dominant source of individual variation in IQ and educational attainment. The most compelling evidence has come out since The Bell Curve was published.

We know that IQ and other measures of cognitive performance are strongly linked to the quality of educational experiences that people have—not just what students learn in a classroom but also what they absorb through their interactions with their parents and their communities and even in their neighborhoods. There’s now very compelling evidence that neighborhoods matter. When children are more or less randomly assigned to different neighborhoods, they have much different economic and educational trajectories.

Likewise, evidence from adoption studies suggest that growing up in more educated households where the parents are regularly reading to the children has a big effect on cognitive performance when they become teenagers and young adults. And evidence from immigration shows that when children from countries with very poor performing school systems come to the United States, if they come at a young age, they move up dramatically in terms of cognitive performance and IQ measures. But if they come, say, after age 10 or in late adolescence, the effect is much more muted. The obvious explanation there is that they’re benefiting from the higher quality educational experiences and exposure to the native population’s culture and resources to a greater extent when they spend more years in that country. All of that is pretty powerful evidence that cognitive ability is a very mutable outcome.

When it comes to groups, there really is no evidence to suggest that genetics has any role in explaining differences. I revisit the history of group averages in IQ scores and show that group scores have changed dramatically over the last 100 years. African Americans raised in the north before Jim Crow had higher scores than European immigrants—and, by the way, were heavily involved in coming up with inventions during the Industrial Revolution. Groups that, in recent years, have showed above-average performance on cognitive tests spent decades with relatively low performance, and there is no genetic explanation for how these patterns and reversals could have occurred.

Likewise, international evidence makes it clear that there are no groups of people who consistently outperform others. This is consistent with scientific evidence that genetic differences between ancestry groups are basically trivial and matches what we know about how social and political factors created opportunities for some, while suppressing opportunities for others.

So how much does education factor in here, and by that I mean unequal access to education?

Studies that allow for comparisons across school districts and communities certainly suggests that African American and Hispanic children and lower-income children generally go to schools that perform worse. We know that there’s a large gap there. And we also know that using more sophisticated measures, such as teacher quality, reveal large gaps. I find large racial differences in exposure to the highest quality classrooms in preschool. We also have very strong evidence that randomly assigning children to higher-quality classrooms or higher-quality teachers has a large effect on learning and on their cognitive performance on standardized exams.

To what degree is our access to education determined by location, where we live?

I’d say the first order problem in educational inequality is unequal access to neighborhoods. Neighborhoods are separated by zoning laws and the types of homes that are available. And that creates many other ancillary problems, the most urgent of which is unequal access to education. The consequences are that African American children in particular, and lower-income children generally, are stuck in the neighborhoods with the lowest-performing schools. And not just low-performing schools, but worse public goods and services on every dimension, including policing services.

If you’re African American, you’re far more likely to be arrested or incarcerated for committing a crime than someone living in a white neighborhood who commits the same crime. Policies like “stop and frisk,” which target African Americans and African American neighborhoods, create dramatically different enforcement than the what you find on college campuses: If you went to a fraternity party on any U.S. college campus you’d find high rates of drug use with nobody getting punished.

In a very intriguing chapter in the book, you talk about the need for merit-based egalitarianism. Can you tell us a little more about what you mean when you say that?

Skills and competencies do differ across people for a variety of reasons, but the variation is much less dramatic than the variation in income that we see in the United States. If people were paid based just on their productivity, we’d have inequality roughly like that of Sweden.

I think we can have a society that rewards people for productive or otherwise socially valuable contributions while also taking care of the poor and those who can’t work. If people were paid based on performance and we removed the political advantages that certain professional elites have carved out for themselves, we’d be much better off in terms of both inequality and economic growth.

Merit-based egalitarianism gives everyone opportunities to acquire valuable skills throughout childhood and eliminates the market privileges that come from uneven political power. Because the vast majority of people are perfectly capable of contributing to society when given a chance, this arrangement will result in an egalitarian society. There would still be rich people—because of extraordinary ideas, contributions, or luck, but their fortunes would be seen as essentially fair. Extreme inequality is unfair because so much of it is not based on merit. Low to moderate inequality could be fair and merit-based.

When most urbanists today talk about zoning they talk about zoning restrictions that limit density and make urban centers more expensive. But you say there’s another, more insidious side of zoning—exclusionary suburban zoning, which denies low-income and minority people access to better schools that white professional people have access to. Seems like this the bigger problem?

I’m much more worried about the exclusionary suburbs. Most cities have more relaxed zoning laws and obviously they are denser, so there are wide swaths of most cities that permit housing of any type. So they tend to have more poor people and low-income people and they’re used to accommodating diversity of economic buying power potential. The biggest problem is the suburbs. Upper middle-class people wanted to preserve their social distinction and so they moved out to the suburbs, carved out new jurisdictions, and made it very difficult for lower-income people to move there, by essentially closing off housing markets. That legacy is still very much with us.

What should we do to limit inequality and get out economy back on track?

A lot of the proposals being offered to reduce income inequality are focused on a 1950s version of the economy, where major U.S. multi-national corporations were dominant and their executives comprised a very large share of the rich. Now we’re in a world where there are fewer corporations than there used to be, and the types of people who have become rich include a wide range of professionals and people involved in finance as well as CEOs and managers of Fortune 500 companies. So we shouldn’t design policies that act upon the mistaken impression that the only rich people are leaders of multinational corporations: We also have to deal with the power of professional interest groups and industry interest groups.

The subtitle of your book is “A Manifesto for Just Society.” How do we do get there? What are the foundations of a truly just society?

Plato essentially said that a just society is one where people do what naturally suits them. To do that, you need equal opportunities for education and for skill development. They can’t be restricted by race or ethnicity or gender. You have to give everyone the chance to reveal their own talent. That requires a commitment to invest in everyone.

John Rawls argued that we need to prioritize the welfare of the least-off. Income inequality should be allowed to the extent that it benefits the least-off. To my mind, this is not is a critique of capitalism or of markets, but an empirical question about whether a market-oriented society can raise the long-term living standards of the least well-off. I believe the evidence suggests that it can, and a politically equal market-based society would create a more productive and less unequal economy, and a more just society.

Powered by WPeMatico

How Can We Combat Inequality and Build a More Productive Economy?

This is the first part of a two-part Q&A with economist Jonathan Rothwell. Read the second part next week.

Inequality and low productivity growth are two of the biggest problems that vex the U.S. economy. For Jonathan Rothwell, they are of a piece, driven by the power of large and influential groups of professionals in fields like finance, medicine, and law to wall themselves off from competition.

Rothwell, formerly of Brookings Institution and now Gallup’s senior economist, shows that the United States is unique among the advanced nations in the power afforded to these groups. The huge differences in incomes we see in this country are not the result of education or skills, but of political power. Inequality in the United States is also bound up with race and racism, from slavery, to the exclusion of minorities from early professional organizations, to exclusionary zoning that denies minority and low-income people access to suburban schools.

I talked to Rothwell about his new book, A Republic of Equals (I liked the book so much I blurbed it). Our conversation has been condensed and edited.

RICHARD FLORIDA: How and why has our republic become so unequal?

JONATHAN ROTHWELL: In the United States, we went from 10 percent of GDP going to the top 1 percent in 1980, to 20 percent of GDP going to the top 1 percent in 2014. That is a much greater rise than we see in the other countries, and we are left with a level of inequality that is more than double what we see in Scandinavian countries.

My explanation is that interest groups that are involved primarily in providing professional services like finance or law or medicine have distorted or corrupted markets. The result is that the members of these groups can charge excessive prices for their services. That’s the main factor driving such high levels of inequality in the United States.

There are extraordinary laws in terms of the monopoly of services that these groups provide. For example, it’s against the law to directly employ a doctor, except for under special circumstances. Hospitals can employ doctors but usually hospitals have to be owned and operated in some part by other licensed physicians. Doctors in particular felt that being part of corporations was demeaning. They felt they needed to distinguish themselves from engineers and other skilled professionals who had become servants of large corporations, so they fought very aggressively through the AMA (American Medical Association) and other organizations to preserve their autonomy and make it difficult for them to become employees or organize healthcare in a more efficient manner. Much the same is true for lawyers. They are allowed to work for businesses if they are on staff as the legal counsel. But otherwise you cannot—unless you’re a licensed lawyer—open and operate an establishment that provides legal services even if the people providing the services are licensed lawyers.

In finance, we have made it illegal for normal people to directly invest in the highest yield investment strategies, such as hedge funds. You have to be rich to do so, an accredited investor. What this means is that companies like Vanguard and Fidelity—which have lowered fees for retail investors a lot—are not allowed to compete with hedge funds, and hedge funds charged egregiously high fees for decades. This ends up siphoning away billions of dollars from worker pension funds to the super rich.

FLORIDA: So, is this the core of what makes America “exceptional?”

ROTHWELL: Yes, other countries don’t have this constellation of rules—and almost no other country compensates elite healthcare professionals as we do. We are also exceptional because of our history of race. Going back the early 20th-century when the northern and midwestern states were dealing with the black migration and the influx of southern and Eastern European immigrants, there was a very widely-held view that people from northern Europe ancestrally were gifted genetically relative to everyone else. It also ties into the extraordinary treatment that professionals receive.

The American Medical Association and the American Bar Association emerged in the early 20th century as prominent and very well-respected organizations and their members were afforded very high levels of prestige. African Americans were prohibited from becoming members of those organizations. One reason why they received so much esteem is that Americans told themselves a story that these are the best and brightest, not only because of what they’ve managed to achieve, but naturally or inherently. So, they need to be respected in ways that go beyond the educational or skill achievements they have acquired—almost like a “natural aristocracy.”

FLORIDA: You write: “A conventional explanation for income inequality is that the most productive companies in highly competitive industries are generating enormous profits for the winners of globalization while everyone else loses out. But the opposite is closer to the truth. The sectors that contribute the most to the 1 percent contribute the least to innovation and global productivity growth.” Tell us more about that.

ROTHWELL: One of the most prominent economic trends of the 20th century is the shift away from goods to services. That’s happened across all rich countries. That has also coincided with a slowdown in productivity. Take healthcare in the U.S., which went from 9 percent of GDP in 1980 to 18 percent in recent years. There’s actually strong evidence that productivity growth is negative for healthcare. It’s well-known that the U.S. spends twice as much on healthcare as other rich democracies like Canada. We know that our healthcare providers are making much higher salaries. We see similar evidence of slow productivity growth in other professional services. The sectors tend to be domestically-focused; they do very little international trading; they are not really exposed to international competition.

It matters because we are often told that U.S. inequality is so high because our entrepreneurs get rich after unleashing great innovations. They do, and that’s great, but there just haven’t been that many entrepreneurs nor many innovations in recent decades. Entrepreneurship is declining and so is productivity growth, and yet the rich are pulling away.

FLORIDA: So, who’s to blame for rising inequality: big corporations, capitalism or capitalists, globalization, technology, trade, robots, or something else?

ROTHWELL: When it comes to, corporations, it’s certainly true that there are rich owners and manager-CEOs in corporate America. And if they were paid less, income inequality would fall. But, other countries also have rich CEOs. Sweden has more billionaires per capita than the United States, and they certainly have many global brands with highly compensated CEOs. The same would be true of Western European countries, and Japan and Korea, which have extremely successful corporations.

The share of GDP going to corporations—C-corporations in particular, which are the ones that are publicly traded—has fallen dramatically over the last 30 to 40 years. Back in the ’50s and ’60s, the economy was legitimately dominated by major corporations like the automakers and GE, but their influence and importance have declined alongside with declining U.S. manufacturing. They have been replaced largely by S-corporations and partnerships; small businesses that typically engage in local markets for medical, legal, and financial services. This is where business income has been going.

Among developed countries, those with low-tariffs and more openness to trade tend to have low levels of inequality. And most of the top 1 percent don’t work in tradable sectors like manufacturing, mining, or communications. Indeed, most OECD countries have a larger fraction of the top 1 percent in these sectors compared to the United States.

Surprisingly, only a small percentage of top earners work in the tech sector or in fields like computer programming. There is some evidence that the adoption of information-technology has disproportionately benefitted workers with higher levels of education. But that does not explain why there are so many doctors and lawyers in the top 1 percent.

FLORIDA:  There is an argument whether the surge in inequality is due to the outsized gains of the truly rich, the 1 percent, or the top 20 percent? Which is it?

ROTHWELL: I would put the income gains from 1980 to 2014, in the top 10 percent. Using data from Piketty (French economist Thomas Piketty) and collaborators, I find that 13 percent of national income went to the top ten percent.

FLORIDA: Who would that top 10 percent be?

ROTHWELL: People in the top 10 percent, but not the top one percent, include a wide range of professionals and managers. The bottom threshold for all income to be in the top ten percent is $120,000 in national income—this includes things like benefits and esoteric income sources like owner occupied rent. For the type of income people report to the Census Bureau, you need $85,000 to be in the top ten percent. To be in the top one percent, you need $488,000 in national income or about $330,000 in income as reported to the Census Bureau.

When I break it down, since 1980 about a quarter of all the income going to the top 10 percent went to those between the 90th and 99th percentiles. About 30 percent went to people earning between the 99th and 99.9th. $2.1 million would be the upper limit of that group.

FLORIDA: That’s a doctor, lawyer, professional person. That’s not a billionaire, right?

ROTHWELL: Exactly.

Powered by WPeMatico

CityLab Daily: Wage Inequality Has Surged in American Cities

What We’re Following

Place a wager: Since 1980, America has shifted toward a knowledge-based economy that concentrates more people and jobs into a smaller number of leading “superstar” cities. That’s grown economic inequality between metro areas, but new research shows it has also generated another disparity within those places: the wage gap.

As America’s largest metro areas have grown, so has the gulf in pay, with wage growth for the highest-paid workers at roughly triple that for the lowest paid. In some cities, the disparity is even wider. Back in 1980, not a single one of the 10 largest metros in the country was among the most unequal for wages. By 2015, five of America’s 10 largest metros—New York City, San Francisco, San Jose, Los Angeles, Houston, and Washington, D.C.—were ranked among the most unequal. CityLab’s Richard Florida has the details: Wage Inequality Has Surged in American Cities

Andrew Small


More on CityLab

The National Public Housing Museum Eyes a 2021 Opening

The museum will tell the history of American public housing in a remnant of a 1930s public housing complex on Chicago’s Near West Side.

Zach Mortice

What’s Really Behind the Native American Health Gap?

Melissa Walls of the Center for American Indian Health talks about the lasting health effects of “Indian Relocation” policies of the 1950s.

Linda Poon

The Mobile Dead Zone on Airplanes

Cell reception is bad after boarding because of the way airports are designed.

Christopher Schaberg

Why We Should Stop Conflating Cities With Innovation and Creativity

The language we use to discuss innovation and creativity has such a pro-urban bias that we’ve forgotten these qualities flourish outside of cities, too.

Richard Shearmur


Eyes on the Tweets

In response to our story last week about the

Navigation trouble is just one of the potential problems with naming transit stations after companies. Another: They give riders the misimpression that transit doesn’t need public money. Revisit Kriston Capps’ story on “namewashing” with Walker’s imagery in mind.


What We’re Reading

See how the world’s most polluted air compares with your city’s (New York Times)

Small American farmers are nearing extinction (Time)

What happened after Trump officials killed a school integration program (Chalkbeat)

The one-traffic-light town with some of the fastest internet in the U.S. (New Yorker)

New York has an old-timey plan to fix its traffic future (Wired)


Tell your friends about the CityLab Daily! Forward this newsletter to someone who loves cities and encourage them to subscribe. Send your own comments, feedback, and tips to hello@citylab.com.

Powered by WPeMatico

Mapping America’s Stark Wage Inequality

One of the most important economic stories of the past couple of decades is the rise of economic inequality in the United States and around the world. As readers of CityLab know, inequality is stark in the “superstar” cities that power advanced economies.

In a new study, economists at the Federal Reserve Bank of New York document this phenomenon in America’s leading cities and knowledge hubs. Jaison Abel (with whom I have previously collaborated) and Richard Deitz track the rise in wage inequality for the country as a whole and across some 200 metropolitan areas over the period 1980 to 2015. Thomas Piketty and Paul Krugman have suggested that 1980 was a tipping point, when advanced economies (and the U.S. in particular) shifted from convergence to greater divergence and inequality across classes and regions.

Wage inequality is not the same as income inequality: It refers to the growing gulf in wages and salaries paid to workers, whereas income inequality is a broader measure of the divide between rich and poor.

The map below, from the New York Fed’s study, charts wage inequality across U.S. metros based on the commonly used 90/10 measure of inequality. This is basically the ratio of the wages of workers in the top 10 percent of the wage distribution (or the 90th percentile) divided by the wages of workers in the bottom 10 percent (or the 10th percentile). In other words, it shows how many times more the top 10 percent of workers earn compared to the bottom 10 percent.

The geography of wage inequality (2015 90/10 ratios by metropolitan area)

(J.R. Abel and R. Deitz, “Why Are Some Places So Much More Unequal Than Others?” Federal Reserve Bank of New York, 2019.)

Across all metros, the top 10 percent makes about five times as much as the bottom 10 percent. But the 90/10 ratio varies depending on the area. On the map, red dots indicate a ratio of more than 7. These are the most unequal places in the country. Pink dots mean a ratio of 6 to 7, and gray dots, 5 to 6. Blue dots have a ratio of less than 5—these are the least unequal places in America.

Red dots are concentrated in and around New York City and the San Francisco Bay Area, as well as in Houston and oil-producing parts of Texas. Pink dots spread to more places along the East Coast’s Acela Corridor and in the Bay Area, as well as parts of Southern California, Southern Florida, and college towns such as Ann Arbor, Michigan. Conversely, gray and blue dots are sprinkled throughout the interior of the country.

The table below compares wage inequality in 2015 and in 1980. It shows the 15 metros with the highest and lowest levels of wage inequality in both years.

The most and least unequal U.S. metropolitan areas, 2015 and 1980

(J.R. Abel and R. Deitz, “Why Are Some Places So Much More Unequal Than Others?” Federal Reserve Bank of New York, 2019.)

What’s striking about this table: Not a single superstar city or major tech hub was one of the most unequal metros in 1980. Most of the places on that list are smaller; only two (New Orleans and Orlando) have more than 1 million people. New York City, San Francisco, San Jose, Los Angeles, Houston, and Washington, D.C. were among the most unequal cities in 2015, but all failed to make the 1980 list.

That said, the Fed economists find wage inequality to be somewhat persistent over time. The correlation between the 90/10 ratio in 1980 and 2015 is reasonably strong (0.5). Indeed, six of the bottom 15 metros and three of the top 15 appear on both lists. As the authors write: “This relatively strong positive relationship suggests that places with the highest levels of inequality in 1980 generally tended to also have the highest levels of inequality in 2015.”

The next chart compares how metros lined up on wage inequality in 2015 (along the Y axis) compared to 1980 (across the X axis). The vast majority fall above the fitted line, which indicates that wage inequality increased in almost every metro in the United States. Quite a few metros come well above the fitted line. These places have seen significant increases in wage inequality over the years.

Rising wage inequality among U.S. metropolitan areas, 1980 to 2015

(J.R. Abel and R. Deitz, “Why Are Some Places So Much More Unequal Than Others?” Federal Reserve Bank of New York, 2019.)

This general rise in wage inequality has been driven by metros like New York City, Los Angeles, Houston, San Francisco, and Washington, D.C. As the study points out, back in 1980, not one of those metros, and not one of the 10 largest metro areas in the country, ranked among the most unequal. By 2015, five of America’s 10 largest metros ranked among the most unequal, and all 10 could be found among the nation’s 50 most unequal places.

City size and wage inequality, 1980 and 2015

(J.R. Abel and R. Deitz, “Why Are Some Places So Much More Unequal Than Others?” Federal Reserve Bank of New York, 2019.)

The relationship between wage inequality and city size can be seen in the chart above. Here, red dots show metro inequality levels in 2015, and blue dots show metro inequality in 1980. Not only are the red dots higher on the graph than the blue dots—indicating the increase in wage inequality—but the fitted line for the red dots slopes upward, indicating the positive association of wage inequality to city size in 2015. The line for the blue dots, by contrast, is nearly flat, indicating a minimal relationship between inequality and city size back in 1980.

As Abel and Deitz note: “In 1980, there was virtually no relationship between city size and the level of wage inequality; however, by 2015, the correlation increased to 0.4, indicating that larger places now tend to be more unequal.”

The next chart breaks out what has been happening to wage inequality in different types of metros around the country. It provides a baseline for the growth in wages for various types of workers in the U.S. as a whole (the black line on the graph). Wage growth for the highest-paid workers has been roughly triple that for the lowest-paid workers. The wages of the highest-paid workers grew by more than 75 percent, while those of the lowest paid grew by less than 25 percent.

Real wage growth for selected U.S. metropolitan areas by percentile, 1980 to 2015

(J.R. Abel and R. Deitz, “Why Are Some Places So Much More Unequal Than Others?” Federal Reserve Bank of New York, 2019.)

In New York and San Francisco (the orange and red lines on the graph), wages have grown across the board for all workers, but have grown the most for the best-paid workers. The lowest-wage workers have seen gains of, say, 25 percent, while the highest-paid workers have seen gains four or five times that or higher.

But wage growth has been considerably flatter in Detroit and Youngstown (blue lines). While the highest-paid workers have seen some gains, these are similar to those of much lower-paid workers in superstar cities. The lowest-paid workers in these places have even seen their wages decline.

Again, it’s important to remember that the study is measuring wage inequality, not overall income inequality, which takes into account non-worker income and income from capital, rents, and transfers. I have been interested in wage inequality and its geography since the early 2000s, when I found that it was highest in leading creative-class cities, and it’s something I picked up on again in my book The New Urban Crisis. According to my own research and other studies, superstar cities do not dominate quite so much on the broader measure of income inequality. Atlanta, New Orleans, Philadelphia, and Miami top the list of large metros on this measure, which is more closely associated with racially concentrated poverty.

The connection between wage inequality and superstar cities jibes with past findings. A 2011 study by my University of Toronto colleague Nate Baum-Snow, and Ronni Pavan found that metro size accounted for 25 to 35 percent of the increase in economic inequality across U.S. metros from 1979 to 2007. My own analysis of 90/10 wage inequality, published in CityLab in 2015, identified San Jose, Washington, D.C., San Francisco, New York, Houston, Boston, and Los Angeles as the nation’s most unequal metros, and found wage inequality to be closely associated with the size and density of metros as well as their concentrations of high-tech industry, the creative class, and college grads. As I wrote back then: “Wage inequality is not just a bug of our new, clustered urban geography—it is a fundamental feature of it.”

Still, it’s a mistake to blame cities for rising wage inequality. A large part of the story is deep structural changes in the national and global economies, as advanced economies have shifted from an older industrial basis to a newer one: knowledge. Deindustrialization and globalization have eliminated huge numbers of blue-collar manufacturing jobs, splitting the labor market between a small number of well-paid knowledge jobs and a much larger number of lower-paid service jobs.

Also, inequality within cities is further reinforced by the huge spike in national inequality. As Robert Manduca has shown, the top 1 percent and top 10 percent of the richest Americans have taken home the lion’s share of economic gains over the past couple of decades, and these groups are disproportionately concentrated in superstar cities.

This pattern is not unique to the United States. Superstar cities all over the advanced world, from London and Paris to cities in the social-democratic nations of Northern Europe, like Stockholm, Amsterdam, and Copenhagen, have seen a similar spike in urban inequality. That suggests that it’s driven by broad changes in the structure of advanced economies and in the disproportionate gains that have gone to the top earners and very richest people.

Over the past decade or so, the progressive mayors of superstar cities have tried many local strategies to mitigate the problem, including higher minimum wages, broader social safety nets, and affordable-housing construction. None of it has made a dent. The surge in urban inequality is the product of forces that are bigger than cities, yet primarily manifest there. Taming these forces will require a broader, more robust combination of national and local actors.

Powered by WPeMatico

Tailored Place-Based Policies Are Key to Reducing Regional Inequality

This is the second part of a two-part Q&A with economist Timothy Bartik. Read the first part here.

Earlier this week, we spoke with economist Tim Bartik of the W.E. Upjohn Institute for Employment Research about his new book on economic development incentives. In that conversation, we covered the dramatic growth in incentives, the reasons incentives are an ineffective economic development tool, and how we might reign them in. Today, in the second installment of our conversation, we talk about another of Bartik’s core interests—the use of place-based policies—a more effective tool for helping distressed communities and addressing regional inequality. Our conversation has been edited for length and clarity.

In addition to your research on incentives, you’ve been writing a lot on place-based policy. You seem to be arguing that economic development policy should shift away from trying to lure companies to a community by handing out incentives and toward investing to develop distressed parts of the country.

If you really want to deal with the employment problems of distressed areas, you need to address the underlying problems that are keeping job creation and employment rates down. What are the problems in a particular distressed area? If you have inadequate skills, you address that. If small businesses have trouble getting services, you address that. If there’s an infrastructure issue, you address that. Throwing cash at a problem, for example, through business tax incentives, has limited utility.

What are the key things policymakers should do here?

Job creation is a valuable goal for policymakers to pursue. I’m certainly not advocating that state and local governments shouldn’t worry about jobs. Any governor or mayor, any state legislature, any city councilperson, needs to think about job creation, particularly if you’re in an area with low-employment rates and low wages. But you need policies that have a good bang for the buck.  

Well-run customized services to small and medium-sized businesses can have much higher job creation effects per dollar than incentives. A good example is customized job training programs, where for example, a community college screens and trains workers for a company’s skill needs. Another example is manufacturing extension services. A program might help a manufacturing firm that was bending metal or molding plastic for autos to refocus on bending metal and molding plastic for medical instruments, which might be a better market. These kinds of services to small and medium-sized businesses have job creation effects per dollar that are five to ten times larger than business tax incentives.

I also think we can help local job creation with better policies to promote land development. There’s some evidence that infrastructure or land redevelopment can be a more cost-effective way of boosting local jobs than simply handing out cash. Handing out cash is easy. That’s part of the reason I think it’s attractive to people. It’s easy to do, and there’s infinite demand for it. Whereas doing these services right is more complicated, but also much more effective.

Nearly half of all jobs in the United States are low-wage, precarious service work. What about extension-like or business-service programs focused explicitly on upgrading low-wage service jobs?

There are some experiments going on around the country in trying to work with businesses to upgrade and improve jobs for low-wage workers. I think there is great potential in expanding services for small and medium-sized service businesses, and focusing on issues like how to improve job retention, how to upgrade training and skill development, and how to create meaningful career ladders within the firm or across firms.

One thing that’s never really fully happened in the U.S. is connecting our labor supply and labor demand policies. That connection is something we need to work hard on: how to get the local economic development and state economic development organizations, the local workforce development agencies, the local schools and community colleges, and the local business community all talking to each other and working together to develop programs that would not only promote business development, but would also promote better access to quality jobs by more disadvantaged groups in distressed places.

What do you think of the new Opportunity Zone program?

I don’t think of the new Opportunity Zone program as really an economic development program. For one, it looks like most of the zones are pretty small areas, they’re more neighborhoods than local labor markets. So, to the extent to which the program actually generates any job growth, the job growth would mostly be redistributing jobs within a local labor market. I think of economic development programs as being defined more at a local labor market level, such as a metro area or at least an entire county or an entire large city. Most people don’t work in the neighborhood they live in. If it doesn’t grow overall jobs in the local labor market, doesn’t significantly improve job opportunities.

Another issue is that the Opportunity Zone program provides a tax break for capital gains, so it doesn’t particularly incentivize job creation. It’s not clear to me exactly to what extent it will actually encourage job creation.

What should the federal government do to address the problems of distressed places and help mitigate the growing regional economic divide in this country?

What I would hope for, under a different federal government with different leadership, would be a serious federal effort to address regional inequality. A big problem in the U.S. is that there are a lot of distressed areas. Some of these distressed places are rural areas that are struggling with jobs and employment. Some are larger urban areas like Detroit, and some are smaller metro areas like Flint. The economy, even with the national unemployment rate being low, is still not performing well for these distressed places. I think that the 2016 election results helped to focus people’s attention on these problems of regional inequality. There’s enough evidence to support a significant federal program to promote smart regional development in distressed areas.

What also seems to be missing from the debate over regional inequality and federal policy is the recognition that the federal government has successfully addressed regional inequality in the past. The Tennessee Valley Authority initiatives made a significant difference for the Tennessee Valley region, largely through providing infrastructure, and also through skills development and public health services. The Appalachian Regional Commission made some difference to the area, even if it did not solve all of Appalachia’s problems.

The federal program I envision is a broad block grant program for distressed areas of the country, supporting the kind of economic development programs and services for which we have good evidence that they work.

One of the things that drives me nuts is when people say we have no evidence that anything can work to solve these regional problems. I don’t think that’s true. There’s evidence that things like customized job training can be quite effective, that manufacturing extension can be quite effective, that other business services can be quite effective. I think it’s true that we don’t have dozens of randomized control trials for these programs. We also don’t have randomized control trials in many other areas of public policy. We have to rely more on good quasi-experimental evidence, from looking at the world and seeing the natural experiments that occur, and then trying to interpret the resulting evidence as best we can.

This federal block grant program would have requirements for places to participate. One would be that places are distressed. Another could be some kind of curbs on the use of tax incentives. That would be more politically viable than trying to outlaw incentives or impose extra federal taxes on incentives, without providing any assistance to deal with the very real job creation problems that some areas have. I think it’s difficult to tell people “don’t do this,” without providing some alternative form of assistance.

In my view, there’s enough evidence to support a significant block grant program for distressed areas, say on the order of $20 billion a year. The U.S. is certainly rich enough that it can afford this level of resources to address regional inequality issues. It’s less than half of what we spend right now on incentives. If the program was well-designed and well-organized, it could be evaluated over time. We could then learn more over time about what strategies are most effective, what strategies are less effective, and how the most effective strategies vary across diverse places.  

Powered by WPeMatico

How Airline Deregulation Fueled Regional Inequality in the U.S.

Various factors have contributed to America’s widening regional divide: deindustrialization, globalization, and the clustering of knowledge jobs in large cities. But it is not just the result of companies and people preferring big, dense cities. National policies also bear some of the blame.

, John Kasarda and Greg Lindsay suggest that airports drive 21st-century economic growth in a way that is similar to how railroads propelled growth in the 19th century, and the automobile and the interstate highway system in the mid-20th century.

As a result of deregulation, small and medium-sized cities have had to turn to incentives—or bribes—to get airlines to provide the service that regulators once required them to provide. As Blonigen and Cristea noted, in a survey by the Airports Council International–North America, more 60 percent of responding airports reported using subsidies or other incentives to attract domestic flights, while more than 40 percent used incentives to attract international flights.

In this way, airports and airline service reinforce and magnify America’s regional divides. As air service has shifted to bigger cities and hub airports, those metro areas gain disproportionately, while smaller and mid-sized metros not only lose flights, but become less connected to the national and global economies, and miss out on the local economic benefits associated with airline service.

Powered by WPeMatico

The Inequality of America’s Tech Centers

Inequality is shaping up to be one of the biggest issues in the 2012 presidential election. The Occupy movement may have waned since last fall, but its focus on the privileges of the top one percent has yet to go away.

Most economists argue that rising inequality is driven by broader structural changes in the economy. Globalization has shifted manufacturing jobs to lower wage countries like China; new technologies and increases in productivity have eliminated millions of the low-skill but high-paying jobs that were left.

Read the full story at The Atlantic Cities.



Powered by WPeMatico