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

59 Pages Posted: 12 Aug 2019 Last revised: 7 Jun 2021

See all articles by Alessandra Fogli

Alessandra Fogli

Federal Reserve Bank of Minneapolis

Veronica Guerrieri

University of Chicago - Booth School of Business

Date Written: August 2019

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.

Suggested Citation

Fogli, Alessandra and Guerrieri, Veronica, The End of the American Dream? Inequality and Segregation in Us Cities (August 2019). NBER Working Paper No. w26143, Available at SSRN: https://ssrn.com/abstract=3435964

Alessandra Fogli (Contact Author)

Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Veronica Guerrieri

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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