Income Inequality and City Size: An Examination of Alternative Hypotheses for Large and Small Cities

Abstract

A N important and growing interest among scholars is the examination of the relationship of the size distribution of income to city size. Such information is critical to the development of urban growth policies and to our understanding of living costs, poverty, and public expenditures in urban areas. Previous studies of this relationship have been motivated by one of the following distinct, although not mutually exclusive, hypotheses: (1) the occupational and wagestructure of the local labor market will change with increasing city size to cause income inequality either to decrease as a result of rising average incomes (Duncan and Reiss, 1956; Murray, 1969; and Richardson, 1973) or increase via a widening distribution of labor skills (Mathur, 1970; Farbman, 1975);' (2) the functioning of capital markets will improve as city size increases so that investment in human capital rises and the average rate of return is depressed to reduce inequality (Frech and Burns, 1971; and Burns 1976); and (3) the principal beneficiaries of increasing city size and urban growth will be those individuals who possess advantages in the marketplaces, such as landlords and individuals owning enterprises with scale economies or holding important non-duplicative executive and bureaucratic positions, so that the benefits from increasing city size will be unequally distributed and cause the level of income inequality to rise (Haworth, Long, and Rasmussen, 1978). To our knowledge none of these hypotheses have been examined for cities that are partially or totally removed from the influence of SMSA economic regions. However, each argument possesses implications for smaller cities which, when examined, produce results relating to the validity and overall understanding of the hypothesis being presented. For example, the monopoly hypothesis may be relevant to SMSAs but we do not know the city size at which monopoly advantages in the marketplaces become significant in worsening income inequality. The relatively smaller demand for rental properties, more competitive business environment, and lesser importance of executives and bureaucrats will substantially reduce the effect of monopoly advantages in smaller cities. It is therefore quite possible that growth in smaller cities may not exert an independent inequality increasing effect on the distribution of income. Arguments can also be made for modificationis in the human capital hypothesis. While an individual's investment in human capital may substantially define his earnings' potential, imperfections in factor markets and discriminatory employment barriers will influence the earnings that are realized. Furthermore, disequilibrium effects in both capital and factor markets resulting from urban growth (in addition to possible changes in attitudes affecting employment barriers) are likely to vary among cities. Consequently, these additioial considerations can influence the equalizing role which capital markets are presumed to play with increasing city size. Moreover, businesses and labor will be attracted or repelled by existing agglomeration economies that are related to city size. Therefore, changes in the occupational and wage structure are not independent of city size. Increases in population in smaller cities may yield gains from specialization and diversification that permit lower income groups to increase their Received for publication May 21, 1979. Revision accepted for publication December 10, 1979. * Northern Illinois University. The author wishes to thank Barry Field and two anonymous referees of this REVIEW for their helpful comments on earlier drafts of this paper. 1 Citing the labor-supply-oriented model by Newhouse (1971) and the labor-demand-oriented model by Thurow (1975), which' both assign industrial mix a major role in inequality, Danziger (1976) finds that 7 out of the 11 major Census occupational groups are significant in explaining inter-city variations in inequality but was unable to relate city size to inequality. Long et al. (1977), on the other hand, found population size and change in population variables to be positive and significantly related to inequality but failed to relate their finding to any particular hvyothesis.