Metropolitan Growth, Inequality, and Neighborhood Segregation by Income

Gerald Carlino:

It is well documented that income inequality has increased in the United States over the past three decades. For example, the variance of the log household income distribution increased nearly 25 percent between 1970 and 2000.¹ Affluent and poor households also have become more geographically segregated in the United States over the past three decades.² More importantly, there is evidence that concentration by income has increased in neighborhoods, leading to greater income segregation within metropolitan areas.³ Tara Watson adds the interesting observation that the interaction between increased income inequality and a city's population growth determines that city's income segregation level. Watson hypothesizes that increasing income inequality creates a demand for income segregation in local housing markets. In her view, income sorting is more easily accomplished in fast-growing cities than in slow-growing ones because the housing stock adjusts more easily in fast-growing cities than in slow-growing cities. That is, observed segregation in cities depends both on the demand for segregation and the adjustment cost associated with changing a city's housing stock. It may take many years for local housing markets to fully adjust to changes in housing demand, especially in distressed cities.

Watson's paper is one of a few recent studies that have stressed the importance of incorporating the adjustment cost associated with the supply of local housing markets. As Glaeser, Gyourko, and Saks have noted, it is "impossible to understand many aspects of urban dynamics without understanding housing supply."⁴ For example, a recent study looked at declining U.S. cities and found evidence that urban decline is mediated by a durable housing stock.⁵ Gyourko, Mayer, and Sinai define "superstar" locations (which include high-amenity neighborhoods within a metropolitan area) as places that are in fixed or inelastic supply.⁶ In the presence of increasing demand, these locations exhibit rising housing prices but little population growth, no new construction, and increased income segregation. While it is possible to quibble with Watson's study on both methodological and empirical grounds, her findings generally support her view that the durability of an area's housing stock is an important determinant of how quickly an area's housing stock adjusts to meet changing demand for neighborhood segregation.

Although Watson mentions the social problems associated with neighborhood segregation, this is not her study's focus, and she does not offer any policy recommendations. Thus I would like to devote some space to these issues. As Watson points out, segregation is problematic since it dramatically limits the accessibility of the city's poorer residents to many public goods and services that ideally should be available to all city residents—good schools, clean and safe streets, cultural and recreational facilities, positive role models, and access to jobs. While neighborhood sorting based on a household's preference for local public goods and tax packages may be efficient, is it equitable? Geographic sorting by income has led to rich households' living in homogeneous suburban neighborhoods and poor families living in central cities. Fiscal or exclusionary zoning has been an important policy instrument used by municipal governments to exclude poor households from suburban neighborhoods. While fiscal zoning is justified on efficiency grounds, it nonetheless denies poor households access to many of the metropolitan area's best neighborhoods and to suburban jobs, and it runs contrary to the egalitarian principles of the United States.

If Watson is correct in her belief that an increase in neighborhood segregation largely occurs with a corresponding change in local housing stock, that view suggests ways in which local governments could reduce segregation. One way is to encourage municipalities to use inclusionary zoning policies that attempt to reduce segregation by requiring that a mix of affluent and less-affluent households be represented in new housing development. Typically, inclusionary zoning programs are the province of local governments and require local developers to build affordable new homes for low-income families in exchange for the right to build a given number of market-rate homes. If Watson is correct, inclusionary zoning policy may be more effective in combating income segregation in the nation...