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The End of the American Dream? Inequality and Segregation in US Cities

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  • Alessandra Fogli
  • Veronica Guerrieri

Abstract

Since the '80s the US has experienced not only a steady increase in income inequality, but also a contemporaneous increase in residential segregation by income. Using US Census data, we first document a positive correlation between inequality and segregation at the MSA level between 1980 and 2010. We then develop a general equilibrium overlapping generations model where parents choose the neighborhood where to raise their children and invest in their children's education. In the model, segregation and inequality amplify each other because of a local spillover that affects the returns to education. We calibrate the model using 1980 US data and the micro estimates of the effect of neighborhood exposure in Chetty and Hendren (2018). We then assume that in 1980 an unexpected permanent skill premium shock hits the economy and show that segregation contributes to 28% of the subsequent increase in inequality.

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  • Alessandra Fogli & Veronica Guerrieri, 2019. "The End of the American Dream? Inequality and Segregation in US Cities," NBER Working Papers 26143, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26143
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    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E0 - Macroeconomics and Monetary Economics - - General
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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