The Larger the City, the Larger the Wage Gap
Business + Economy

The Larger the City, the Larger the Wage Gap

The larger the city, the wider the wage gap among workers, according to a new report from researchers at the University of Rochester and Brown University.

The study, which analyzed U.S. Census and American Community Surveys data from 1980 to 2007, found that while wages have typically been higher in America’s biggest cities for decades, the wage gap between the wealthiest and the poorest intensified over the last three decades as salaries surged.  By contrast, before 1979, the average wage gap for an American worker was nearly equal regardless of location.

The most educated young, ambitious professionals flock to large metro areas along the coasts to work in professional services, information technology, and other growing enterprises, according to Harry Holzer, a labor economist at Georgetown University and at the Urban Institute.  “Even when they get older, get married, and move to the ‘burbs’ they stick around because that’s where the business opportunity is,” Holzer added.  The pattern also affects low-end workers and immigrants who are attracted to metro areas for the service opportunities.  For example, a metro area flooded with high-income professional women will naturally have a higher demand for child care and housekeeping services, Holzer said.  “So by drawing high end workers and low end workers in greater numbers, that’s going to mean wider gaps in income than elsewhere.”

Another cause for the wage disparity may be the U.S. corporate structure’s evolution over the last several decades, said Michael Stocker, a partner at Labaton Sucharow, and specialist in corporate governance and executive compensation. Stocker says he is convinced that the expanding pay gap between cities and rural communities “is directly connected to the skyrocketing executive compensation packages we have seen over the last few years,” and is not apt to end anytime soon. For years, publicly traded companies have offered CEOs company stock options as part of their compensation as a way to align their interests with that of their shareholders.

However, other factors outside of rising salaries in big cities are at play, said Timothy Smeeding, director of the Institute for Poverty Research at the University of Wisconsin-Madison.  “In rural areas, you just don’t have the aggregation of human capital that you have in big cities and university towns, and there’s much less income in general,” he said.

There’s also the continued demise of the manufacturing sector over the last thirty years.   “In rural areas… each town tends to be a one-industry town,” Smeeding added.  “But as workers in those industries have been getting older and older, there are very few hires at the bottom to replace them—since these manufacturers have figured out a way to keep labor costs low and output high by using machines.”  As a result, a lot of young, rural residents either struggle to find work, or go into the military, he said. 

The report also concludes that the wage disparity is heightened because larger cities are better equipped than rural areas and small towns to support advanced technologies and industries.  Furthermore, “as financial centers, larger cities have easier and cheaper access to capital for bankrolling new ventures,” the report says.

As a result, highly-skilled and educated workers are better able to command higher salaries.  Though college graduates make up a larger percentage of workers in large cities, the study found scant evidence that this educational composition caused salaries to soar. 

For example, some of the top partners at law firms in New York, Washington, D.C., Los Angeles, and Chicago earn $10 million or more per year, compared with the $640,000 the average partner at an American firm will earn, according to a Wall Street Journal report.  Similarly, the average family doctor earns $175,000 a year, versus specialists like oncologists, radiologists, and orthopedic surgeons who earn an average $385,000, $417,000 and $519,000 per year, according to Merrill Hawkins, a medical recruiting service.  And proportionally, more rural doctors are primary care providers (54 percent, according to a 2005 study) compared with cities (where 38 percent are primary care).

The disparity results from the wildly different nature of the type of work an urban lawyer or doctor does compared with their counterparts in rural communities, Holzer said.   “Small town lawyers are mostly going to be involved in local small businesses or personal matters,” where there is typically much less cash to be had, he added.  “The most prestigious law firms are the ones in New York, Washington, D.C., and Lost Angeles where they deal with the financial community and the largest companies.  And that work is no doubt much more lucrative because those clients have the deepest pockets,” he said.