Economic inequality has been mounting in the United States, hitting levels not seen since the Gilded Age.  There are numerous explanations for this phenomenon, ranging from the decline of unions and high-paid manufacturing jobs to the rise of globalization, of new technology, and knowledge-based work (what economists call “skill-based technical change”) and the bifurcation of the labor market into high-skill and low-skill jobs.

But do our cities and changing economic landscape play a role as well?  There are good reasons to suspect that they do.  For one, the past decade or so has seen a sorting of population by skill, occupation and human capital, (see my 2006 article “Where the Brains Are”).  For another, it is well known that both highly skilled and talented people and productive firms and high-tech industries tend to cluster and agglomerate together to create powerful economic advantages.

An important study entitled “Inequality and City Size” by Ronni Pavan of the University of Rochester and Nathaniel Baum-Snow of Brown University and the National Bureau of Economic Research takes a close look at this issue.  Using data from the American Community Surveys of the U.S. Census, Pavan and Baum-Snow tracked the gap between the lowest and highest reported incomes across U.S. between 1979 and 2004, from the smallest rural areas to the biggest urban centers. They examine the effects of city size on wages while controlling for factors like human capital and work effort  - key factors in determining wages outlined in the seminal work of labor economist Jacob Mincer – and the composition of local industry.

The chart below, adapted from their study, shows their key findings. The X axis is based on city or metro size – ranging from rural areas indicated by a 0 to the largest metropolitan regions. The Y axis shows the level of inequality.  The green line is for 1979, orange for 1989, magenta for 1999, and blue for 2004-07.

In 1979, the line was relatively flat, rising only slightly for the largest metros: Inequality was relatively the same regardless of whether you lived in a rural community, small city, or large metro. But with each passing decade the slope grows steeper, the gap between haves and have-nots growing progressively larger by city size. The study finds that city-size alone accounts for roughly 25 to 35 percent of the total increase economic inequality over this period over and above the role of effects of skills, human capital, industry composition and other factors.  This effect is more pronounced among lower wage earners. City size explains 50 percent more of the increase in inequality for the lower half of the wage distribution than for the upper half, the study finds.

“Something fundamental has changed in our economy, and it’s happening at the metropolitan level,” explains Baum-Snow. “If we want to understand what’s causing the wage gap, we now know we need to look at the unique economies of our larger cities,” adds Pavan.

Both the U.S. and the world have grown increasingly spiky, with our socio-economic divide increasingly overlaid with a growing economic geography of class.  Big cities like New York and LA have attracted wealthy people not just from America but from around the world.  This trend reflects the growing advantages of geographic clustering or agglomeration.  The larger and more populous a city or region, the more likely it is to have the human capital and economic ecosystems required to support the most advanced—and hence the highest-paying— technologies and industries.  Bigger cities attract more innovators, more entrepreneurs, and more highly skilled and ambitious people in general, and provide a fluid environment where these individuals can combine and recombine their skills. Big cities also generate powerful economies of scale and scope, resulting in higher rates of innovation, new firm formation, and productivity.  They attract better-educated, better-trained, more-experienced workers, driving up wages.

At other side of the spectrum, manufacturing, which once clustered in and around large cities and metros, has shifted to less expensive suburban, exurban, and off-shore locations. And large cities have become home to a large and growing contingent of lower-skill, lower pay service jobs – from childcare and food preparation to retail sales and personal services.  Taken together these factors have in effect divided or bifurcated the labor market in big cities into highly paid “creators” and much lower-paid “servers.”

Despite this divide, big cities may still offer a better environment for less-advantaged, lower-skilled workers. As urban thinkers from Jane Jacobs to Edward Glaeser have argued, big cities improve economic conditions for everyone, including the least well-off, compared to what they could expect in smaller cities or in the countryside. Big cities typically offer better paychecks even for low-skill jobs.  And even though housing and other costs are higher, bigger cities provide more opportunities and a thicker labor market for just about anyone to move up the socio-economic ladder and find new opportunities when needed.

With the help of my colleague, Charlotta Mellander, I took a quick look at the association between cities and wages. Using micro data on millions of individuals across U.S. metros, Mellander calculated the residual values for the average wage across these metros.  This amounts to a location premium which shows how much, on average, the metros pay in wages after controlling for skills, education and hours worked.

Workers on average gain the most from living and working in San Jose, California, where the location premium is $13,479. The location premium is above $10,000 in the metros – Charlotte, Orange County, and Nassau.  New York, Los Angeles, Chicago, the District of Columbia, Philadelphia, Baltimore, San Francisco, Minneapolis, and Houston number among the top 20 metros on this measure (see the map above).

Mellander then ran a basic correlation analysis comparing this location premium to city size. Not surprisingly, the correlation is positive and significant (with a coefficient of. 24). While not overwhelming, it suggests a modest association between average wages and city size (see the scatter-graph below). Bigger cities or metros on average pay higher wages overall, even when skills, education and work effort are taken into account.

All of this leads to an intriguing conclusion about the connection between cities and wages.  On the one hand, city-size has become a factor in increasing inequality, magnifying the underlying bifurcation of the labor market. On the other hand, bigger cities appear to pay better average wages.  Cities make us richer, more productive and increase our wages, even as they reflect and compound the growing social and economic divides of today’s increasingly spiky world.

Paul Graham speculates that startups may herald a new era of political economy:

Startups may represent a new economic phase, on the scale of the Industrial Revolution. I’m not sure of this, but there seems a decent chance it’s true. People are dramatically more productive as founders or early employees of startups–imagine how much less Larry and Sergey would have achieved if they’d gone to work for a big company–and that scale of improvement can change social customs.

He notes that startups are highly clustered in certain cities:

Startups are a type of business that flourishes in certain places that specialize in it–that Silicon Valley specializes in startups in the same way Los Angeles specializes in movies, or New York in finance.

And he’s concerned about what this means for society:

If so, this revolution is going to be particularly revolutionary. All previous revolutions have spread. Agriculture, cities, and industrialization all spread widely. If startups end up being like the movie business, with just a handful of centers and one dominant one, that’s going to have novel consequences.

The spiky nature of our era – evident in everything from startup clustering to rising economic and geographic inequality – is among the most critical issues of our time. The crisis creates the opportunity to address it. But for some reason, U.S. and global policy-makers are unable or unwilling to take it on. The consequences will surely come back to haunt them sooner or later.

As a graduate of the U of Michigan, I can only try to forget what an awful football season we have just endured. However, a recent WSJ article reminded me that the Big 10 football conference and all major conferences are being outperformed by the teams of the Southeastern Conference (SEC).

The WSJ asks “What the rise of Southern Football Says About America,” in an interesting piece by Darren Everson. And while there is no overt mention of Detroit’s Auto Industry and the South’s Auto Industry in the article, the ongoing bailout saga kept popping into my head as I read the article. A snippet:

In recent years, the South has undergone rapid growth. Twenty-seven of the 50 fastest-growing metropolitan regions in the country in 2007 were in the South, while personal-income growth in the region outpaced the national average over the past decade. These changes have added muscle to the South’s historic passion for college football. While they rank low in many measures like per-capita income and educational achievement, states like Alabama and Mississippi rank close to the top in the percentage of high-school students who play football. And among states that have more than 10 native sons playing in the National Football League, the top six producers by percentage of population are Louisiana, Mississippi, South Carolina, Alabama, Florida and Georgia.

I began to wonder, is there some connection between the success of SEC football teams and the rise of the Southern Auto Industry?

Are Big 10 teams stuck with ‘Fordist’ football models while SEC coaches and administrators make use of ‘continuous improvement’ and other concepts in order to strengthen their programs? Are SEC leaders better at innovating with recruiting, play calling, and conditioning? (Remember, Gatorade was created at the U of Florida.)

The article points out a few potential theories for why the SEC has grown into such a football powerhouse, including pride of place that Southerners exhibit in their states, tight relations between SEC schools and Southern politicians, and academic standards in the SEC that differ from other conferences such as the Big 10 and PAC 10.

While there is likely no connection between successful SEC football and the successful Southern auto industry, it highlights the spiky nature of the creative economy – from auto production and college football administration to content creation and biotech. I believe that is what the rise of Southern football tells us about America.

BTW, I will remind all SEC fans that Michigan (and its old school coach Lloyd Carr) did beat Florida (and new school coach Urban Meyers) handily during last January’s Capital One Bowl Game.

Richard Saul Wurman’s recent offering, 19.20.21, is an interesting step toward a more comprehensive understanding of our future “spiky” world. The site is well worth a visit, and (if you have not read it yet) Richard’s article on the subject (PDF) is also worth reading.

Entrepreneur Russell Simmons understands the spiky nature of the creative economy and has launched a new creative industries “bplan like” contest called the The Race to Be: The Creative Entrepreneurship Contest. The event is the centerpiece of this year’s Global Entrepreneurship Week (Nov. 17- Nov. 23).

The contest has three categories: film, fashion, and music. Applications can be submitted online and the finals of each category will take place on-site in spikes of industry/artistic excellence: film in LA, music in Austin, and fashion in NY. From the contest website:

The competition targets 18 to 29 year olds interested in film, music and fashion who want to become young entrepreneurs. From Oct. 2 through Oct. 31, applicants may apply online at www.racetobeusa.com and submit a sample of an existing creative work to compete.

• Five finalists from each category will be selected from the online submissions and will bring their portfolio of completed creative work to the event where they will compete in an onsite challenge. Each genre’s competition will be held in its respective artistic center:

o Film – BE. The Story on November 17, Sony Pictures Studios, Los Angeles
o Music – BE. The Sound on November 19, Austin, Venue TBD
o Fashion – BE. The Style on November 21, New York Stock Exchange, New York

At each event, a panel of industry experts will serve as mentors and conduct a workshop focused on the importance of creativity, innovation and entrepreneurship in today’s business world. Each finalist will be paired with a mentor who will work with the individual to create an entrepreneurial concept and develop a marketing pitch for their work.

• At the end of the day, each finalist will present his or her work and make a “pitch” to the panel of judges. The judges will score each presentation in four categories: creative content, business viability, marketability, and the “it” factor.

• The winner of each competition will receive $5,000, a mentoring opportunity, possible internship and post-event PR exposure for their winning concept.

I have been researching business plan competitions for four years now and it’s amazing how the model has evolved and moved way beyond the campus.

This competition speaks directly to the creative economy and the creative class and while its cash prize doesn’t distinguish it, Russell Simmons, the categories and format, and the opportunities to network make it a special case. It also, obviously, underscores the great concentrations of talent that exist.

Check out the application (deadline is Oct. 31) and share your great ideas or works in progress with Russell Simmons and the world during Global Entrepreneurship Week. Good luck!

The spiky world and the rise of the mega-region make place more important then ever before. But what if your place is not part of a mega-region or a spiky center? Two places our team has thought a great deal about are Australia – where Sydney, Melbourne, and Brisbane do not form a mega-region – and Scandinavia, where Stockholm, Copenhagen, Oslo, and Helsinki are also too far apart. One idea is to deepen connective tissue and form “virtual” mega-regions of sorts.

U.S. Endowment takes on the even thornier issue of how rural areas can connect to spiky globalization which suggests “that individual rural communities will have an increasingly difficult time competing. Thus, the need to form ‘mini-regions’ built upon clustering of potential that if not ready to compete globally are vitally linked to mega-regions in a symbiotic relationship.”

Sounds reasonable to me: What do you think?