The Determinants and Welfare Implications of US Workers' Diverging Location Choices by Skill: 1980-2000

The Determinants and Welfare Implications of US Workers' Diverging Location Choices by Skill: 1980-2000

American Economic Review. March
2016, Vol. 106, Issue 3, Pages 479-524

From 1980 to 2000, the rise in the US college/high school graduate wage gap coincided with increased geographic sorting as college graduates concentrated in high wage, high rent cities. This paper estimates a structural spatial equilibrium model to determine causes and welfare consequences of this increased skill sorting. While local labor demand changes fundamentally caused the increased skill sorting, it was further fueled by endogenous increases in amenities within higher skill cities. Changes in cities’ wages, rents, and endogenous amenities increased inequality between high school and college graduates by more than suggested by the increase in the college wage gap alone.