Business Services, Income Inequality, and Income Segregation in Metropolitan Areas: Direct and Indirect Links

Abstract

This article investigates business services employment as a driver of income segregation. Theory and intuition suggest that two pathways operate simultaneously. First, business services are marked by huge internal differentiation, low union density, and individualized pay schemes, all of which raise income inequality, and, in turn, income segregation. Second, business services are subject to strong agglomeration economies, which increase the importance of the employer–employee relationship: corporations tend to locate in the vicinity of their staff, and the staff favor residential locations close to actual and potential workplaces. I test these ideas with annual data from metropolitan areas in Norway, covering the period from 1980 to 2018. I measure segregation at the census tract level, and control for education, nonemployment, immigration, age, and gender. A key finding is that business services, particularly financial activities, exert a strong influence on income inequality but also, and independent of the former effect, on income segregation. The latter impact is surprisingly strong, whereas the impact on inequality has a limited ripple potential, that is, it affects neighborhood sorting to a lesser degree than expected. A suggested explanation for the pattern is, first, that public policies reduce individual and spatial inequalities, and, second, that public policies fail to influence the organization and operation of business services.