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Over the last three decades, residential segregation by income has become an increasingly important feature of the U.S. metropolitan landscape. From 1970 to 2000, income sorting grew in large cities. In the 1980s almost all American metropolitan areas experienced a rise in segregation of the rich from the poor, though these changes were slightly offset by modest declines in segregation during the 1990s. More than 85 percent of the U.S. metropolitan population lived in an area that was more segregated by income in 2000 than in 1970. The time trend in residential segregation by income hints that income inequality may play an explanatory role. Mayer (2001) uses a panel of states to provide evidence that rising income inequality is associated with rising residential segregation by income.¹ Income inequality at the top of the income distribution is associated with residential isolation of the rich, while income inequality at the bottom of the distribution is associated with residential isolation of the poor.

It is perhaps unsurprising that the metropolitan areas with the largest growth in segregation include a number of distressed cities in industrial decline, such as Buffalo, New York, and Flint, Michigan. These metropolitan areas had large increases in income inequality associated with the demise of their manufacturing sectors. There is a sizable literature examining the flight of white, middle-class residents from the central cities of distressed metropolitan areas and the consequent residential isolation of the minority poor.² The implications of this change for housing construction have received less attention. Interestingly, a number of old manufacturing centers, such as Buffalo and Flint, witnessed a fair amount of new housing construction despite population declines.

Figure 1.

Relationship between Changes in Family Centile Gap Index, 1970-2000, and Metropolitan Area Population Growth, 1970-2000, Relative to 1970 Population^a

Income segregation also rose in a subset of booming metropolitan areas. Tucson, Arizona, and Reno, Nevada, for example, saw increases in income segregation over the past three decades that were comparable in magnitude to those in Buffalo and Flint. The relationship between growth in segregation and growth in population is U-shaped, with both rapidly growing and stagnating metropolitan areas experiencing rising income segregation (see figure 1).

This paper, which investigates how income inequality and metropolitan growth interact to generate changes in residential segregation by income, proposes a simple model suggesting that rising income inequality creates pressure for income sorting in residential markets. In rapidly growing metropolitan areas, changing preferences are quickly reflected in the housing stock and level of segregation. In slowly growing metropolitan areas, however, the housing stock reflects the preferences of previous generations of residents. If existing housing costs less than the price of new construction or retrofitting, there is little incentive to change the housing stock. Rising segregation occurs in slow growth areas only if the change in market pressure for segregation is sufficient to overcome the costs of new construction or retrofitting. A key feature of the model is that changes to the housing stock are necessary to allow the resorting of income groups.

Why does economic segregation matter? Income sorting affects the distribution of role models, peers, and social networks. Sociologists hypothesize that the lack of neighborhood exposure to mainstream middle-class role models and social networks is a major contributor to urban joblessness and social problems.³ A number of empirical papers also suggest that the characteristics of one's neighbors and peers in school affect social and economic prospects,⁴ though the issue is far from settled.⁵ If households sort into different political jurisdictions, economic segregation affects the degree of fiscal redistribution among income groups.⁶ Even within political units, neighborhood-level sorting may influence the average level and variance of school quality and other local public goods. Finally, the factors that motivate households to segregate by income also shape the spatial relationship between jobs and homes, in turn affecting commuting patterns and labor-market decisions.

Each of these factors is amplified by the political process because economic segregation itself shapes the context in which policy decisions...