We’ve heard a lot over the years about how the U.S. economy has made the rich richer and the poor relatively poorer.
It’s true. Today, workers in the top 10 percent of the wage distribution make five times what workers in the bottom tenth make — a much bigger gap than existed 40 years ago, according to new research on wage inequality out this month.
But while wage inequality has increased in almost every metro area in the U.S. since 1980, it’s happened much more in some places than others: Coastal cities with big tech and finance industries have tended to see bigger increases in inequality, while Midwest and Great Lakes metros with stagnated economies have seen less growth in inequality.
And then there’s Minneapolis-St. Paul, which saw some increase in inequality in the last four decades, but not as much as researchers would predict for a city of its size.
Federal Reserve economists are increasingly recognizing national economic inequality as both an economic issue and a social one, said Jaison Abel, of the Federal Reserve Bank of New York, an author of the study, called “Why Some Places Are So Much More Unequal Than Others?.”
Nationally, workers in the top 5 percent saw wages double between 1965 and 2015, from $70,000 to $145,000. For workers at the 50th percentile, wages increased from $30,000 to $45,000, and for workers in the bottom 10 percent, wages increased just $5,000, from $15,000 to $20,000 (in inflation-adjusted 2015 dollars).
Broadly, research has found the root of wage inequality is larger paychecks over time for skilled workers and relatively smaller paychecks for less-skilled workers. But less research had been done to understand how that divergence in earnings has played out on the regional level, Abel said.
He and Richard Deitz, also of the New York Fed, decided to break down wage inequality by region, looking at changes in wages over time in nearly 200 U.S. metro areas.
What they found was vastly different levels of inequality in different parts of the country. In New York and San Francisco, among the metros with the most inequality, the top 10 percent of wage earners made seven times the amount the bottom 10 percent of wage earners did.
That represents a big increase in inequality over 1980 levels in those cities, when the top 10 percent made just four times more than the bottom 10 percent.
By contrast, the top 10 percent of wage earners in Johnstown, Pennsylvania, Sheboygan and Wausau, Wisconsin, made roughly four times the amount the bottom 10 percent did in 2015, a ratio virtually unchanged since the 1980s.
What could cause such differing levels of inequality, and such divergence over time?
The pulling apart of wages started in the 1980s, Deitz said, with changes in technology creating a demand for high-skilled workers, and high-skilled workers increasingly congregating in big cities along the coasts.
“It’s certain types of workers, especially those with the highest skills, who get the most benefit from working in large metropolitan areas with the highest wages, he said. Those are the places where there’s more inequality.”
By contrast, workers in cities where economies are more stagnant — and sometimes reeling from the loss of manufacturing jobs — are seeing less inequality.
“Those places, the wage distribution gets more compressed. There’s less inequality where economic conditions are more on the sluggish side,” he said.
The Twin Cities
In 1980, Minneapolis-St. Paul ranked 124th among 196 large metros in terms of inequality, with the top 10 percent of wage earners making 3.9 times the bottom 10 percent of earners’ wages. In 2015, the research found, it ranked 100th, and the gap between the bottom and the top of the wage distribution had widened to a factor of 5.2.
That puts the Twin Cities in the company of smaller metros like Fort Collins, Colorado; Racine, Wisconsin; and Akron, Ohio — somewhat surprising for a city of its size, Abel said.
“It’s not a huge metro, but it’s a bigger than average metro, so that would suggest you’d see a little more rise in inequality,” he said.
What explains Minneapolis-St. Paul’s place in the ranking is likely its range of industries.
Wage inequality is largely driven by gains for the highest earners. These days, the sectors with some of the highest earners in the U.S. are tech and finance. Minneapolis-St. Paul doesn’t have as much tech or finance — particularly tech investing and finance — compared to the country’s biggest cities, said Abigail Wozniak, a senior research economist at the Federal Reserve Bank of Minneapolis.
“While the Twin Cities have seen strong employment growth, they haven’t seen growth in the sectors that are driving those biggest increases in inequality,” she said.
Metros that have built out economies based on tech over time have seen long-range economic growth.
“The tech boom has been going on for a long time now. It seems likely that cities that have not had a big stake in it, it’s going to take quite a long time to close that gap,” she said.
So while MSP hasn’t seen the growth in tech and other high-wage sectors seen in other cities in the last 40 years, it also hasn’t seen the big rise in inequality that often comes with it.
“Whether that’s good or bad depends on your perspective,” Wozniak said.