In cross-sectional American census data, we document that isolated cities tend to have less wage inequality. To explain this correlation and other correlations between population and wages, we build an equilibrium empirical model that incorporates high and low-skill labor, costly trade, and both agglomeration and congestion forces. The model bridges the gap between the spatial inequality literature which abstracts from geography, and the economic geography literature which abstracts from inequality. We find that geographical location explains 9.2% of observed variation in wage inequality across American cities. In counterfactual experiments, we find that reductions in domestic trade costs benefit all American workers and decrease welfare inequality. We also examine the effects on inequality and welfare of both regional and national skill-biased technology shocks. We find that in larger cities wage inequality grows more than welfare inequality.
|Number of pages||47|
|Publication status||Published - 2017|
|Event||2017 Annual Meeting of the Society for Economic Dynamics - Edinburgh, United Kingdom|
Duration: 22 Jun 2017 → 24 Jun 2017
|Conference||2017 Annual Meeting of the Society for Economic Dynamics|
|Period||22/06/2017 → 24/06/2017|