Birds of a Feather: St. Louis Fed Analysis Suggests People of Similar Income and Education Gravitate toward Same Neighborhoods

ST. LOUIS — Residential neighborhoods throughout the nation's metropolitan areas have become increasingly divided into high- and low-unemployment sections, and an analysis by an economist with the Federal Reserve Bank of St. Louis suggests that people may be "sorting" themselves by both income and education.

The analysis was conducted by Christopher H. Wheeler, writing in the March/April issue of Review, the Reserve Bank's bimonthly journal of economic and business issues. The publication is also available online at the St. Louis Fed's web site.

The rate of unemployment is one of the most basic indicators used to gauge the economy's health. As the economy fluctuates between periods of expansion and recession, corresponding changes in the rate of unemployment are observed.

Between 1980 and 2000, the aggregate national unemployment rate fell from 6.3 percent to 3.9 percent, suggesting that workers in the United States faced better unemployment prospects in 2000 than in 1980.

"Yet, underlying these figures," said Wheeler, "is a trend that is not widely known: Unemployed workers became increasingly concentrated in certain neighborhoods within the nation's metropolitan areas. That is, neighborhoods in the United States became increasingly polarized into two groups: those with high rates of unemployment and those with low rates."

Wheeler investigated three possible explanations for this trend:

• Urban decentralization; that is, the gradual movement of people from the central cities to the suburbs. "This may have reduced the employment opportunities of households that continue to live in historical city centers," said Wheeler, "thereby creating a cluster of joblessness within those inner-cities."
• Changes in the labor market, such as declining union membership and the shift of employment away from manufacturing toward other sectors, may have reduced the employment opportunities for workers in certain neighborhoods more than others. "For example," said Wheeler, "if a city's low-to-middle-income communities are populated primarily by manufacturing workers, a decline in the manufacturing sector could result in higher unemployment in those areas. By the same token, if the residents of another neighborhood are employed predominantly in high-paying professional services, then a rise in the demand for those services may result in more jobs.
• Possible increase in the extent to which skilled and un-skilled workers are segregated across residential areas. "In other words, independent of either urban decentralization or shifts in union and industrial activity, the degree to which high- and low-skilled workers live in the same neighborhoods may have decreased over time could lead to a rising concentration of unemployed people."

Analyzing unemployment data across nine broad industrial sectors, Wheeler found little evidence to support the first two explanations. His results, however, did reveal a strong association between unemployment concentration and measures of both income segmentation and the segregation of college graduates across neighborhoods.

"A rising concentration of those who are unemployed seems to be related to an increase in the extent to which households have separated themselves into certain neighborhoods by both income and education," concluded Wheeler.

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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