Income inequality has risen in the United States over the past three decades. While many economists have documented this trend, few have studied its residential aspects. In a paper entitled Neighborhood Income Inequality, we examine whether rising income inequality has been accompanied by increasing residential segregation by income.
Relatively wealthy households may face increasing incentives to separate themselves from households with lower incomes as the income gap widens. As incomes rise, so does the demand for land. If the majority of suburban growth in recent decades involved the movement of relatively wealthy households, then the extent of residential segregation between rich and poor may have increased.
With rising income inequality, relatively wealthy households also may have congregated because they share similar tastes for public goods, preferences for positive peer influences or a desire to avoid crime. This segregation may have become reinforced over time.
We examine these patterns of segregation by using a sample of nearly 165,000 small neighborhoods within U.S. metropolitan areas to calculate two components of income inequality. The first measures the extent of income inequality among households within the neighborhoods of a metropolitan area. When this type of income inequality is relatively high, we know that neighborhoods are relatively integrated by income level. The second component measures the extent of income inequality among households that live in different neighborhoods. This measure captures the extent of residential segregation by income between neighborhoods.
We found that that the majority of income inequality during the past three decades has been associated with inequality within, rather than between, neighborhoods. In each year, more than 75 percent of income inequality within a typical metropolitan area can be linked to income inequality among households living in the same neighborhood.
Despite this fact, we discovered a significant run-up in between-neighborhood inequality during the 1980s. Over this period, the portion of the average metropolitan area's overall income inequality attributable to inequality among households living in different neighborhoods rose by nearly 60 percent. Between-neighborhood inequality decreased slightly in the 1990s.
Metropolitan-level results for Louisville and Memphis are generally consistent with these trends. Louisville has experienced only three percent more overall inequality, on average, and 47 percent more between-neighborhood inequality, compared with the typical U.S. metropolitan area. In each year, more than 70 percent of Louisville's income inequality has been linked to within-neighborhood income differences. Louisville also saw its share of between-neighborhood income inequality increase by 30 percent during the 1980s.
But Memphis experienced overall average inequality that is 17 percent higher than—and between-neighborhood inequality that is more than double—the typical U.S. metropolitan area level. Still, in each year more than 61 percent of Memphis's overall inequality can be linked to within-neighborhood inequality. Memphis' fraction of overall income inequality attributable to between-neighborhood differences also increased during the 1980s by 44 percent.
Overall, results suggest that U.S. metropolitan areas have experienced the majority of their income inequality among households within individual neighborhoods. Over time, this residential integration may prove to be beneficial for lower-income households, since individuals tend to be positively influenced by the characteristics of the neighborhoods in which they reside. However, income inequality between neighborhoods rose significantly in the 1980s, and is also relatively more acute in cities like Memphis that tend to be more segregated along these lines.
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Fed in Print: An index of the economic research conducted by the Fed.