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Rewards for moving reflect stagnation for those left behind

  • January 23, 2019
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In my post on Monday on the three types of strategies governments can pursue to address regional divergence — the challenge of places growing apart — I mentioned in passing: “Regional differences are, after all, strongly driven by the diverging returns to high skill between leading and lagging places.” This fact is a reason, I argued, to opt for strategies of “attraction”. These are policies that boost highly productive human capital in lagging places, which in human terms means making them attractive for high-skilled people to live in.

I want to elaborate on this factual point, partly because it is not well known, partly because it is clearly pivotal for the argument and partly because new research currently receiving a lot of attention throws some new light on it.

The research in question is by MIT economists David Autor and Juliette Fournier, and was presented in the former’s Ely lecture at this month’s annual convention of US academic economists. (You can watch a video of the lecture, titled “Work of the past, work of the future”, or watch the slides.)

It has caught the attention of the New York Times’s Upshot column, the Economist and Quartz, as well as here in the Financial Times. They all highlight a most striking geographical feature of Autor and Fournier’s research, which is that the “urban wage premium” for low-skilled workers in the US has disappeared. It used to be that workers with less than a college education could earn a much higher wage by moving from towns or countryside to a big city. That is no longer the case: the prospects for non-college graduates are now about the same everywhere. Not so for college graduates and more highly educated workers, for whom the urban wage premium has, if anything, increased. Below is the Upshot’s elegant summary graph of the researchers’ data.

Autor attributes the decline in the non-college urban wage premium to the disappearance of mid-skilled jobs, the geography of which should not surprise us because those jobs mostly existed in more densely populated places to begin with. But here is what is more intriguing: commentators have taken the erosion of the urban wage premium to be a bad thing, because it has removed an opportunity for people with little education to improve their lot.

But it is possible to look at this data another way round, which invites quite a different evaluation. Not only is it possible; it has been done and we have covered it here before. Elisa Giannone documented in a paper two years ago the separate regional pattern of wage growth for non-college workers and college graduates. Below is a chart of her key finding: wages at all education levels converged between low-paid and high-paid places until the 1980s, but after that college graduates’ pay began to pull away in the places that already paid more, while that of non-college workers continued to converge.

This is the flip side of the coin to Autor’s findings. To say that the urban-rural wage premium has disappeared, which sounds like a bad thing, is to say that wages in the lower-paid less populated areas have caught up with wages in higher-paid cities, which sounds rather better. And look again at the first chart (from Autor’s work) — the reason non-college workers no longer have anything to gain from moving to the city is indeed because rural wages have caught up with urban ones. Conversely, the continued wage premium for college graduates reflects stagnant or intensifying regional inequality in pay for those workers. Since the share of college graduates has steadily increased and they increasingly live in cities, this urban wage premium is the main factor in the way US regions have been growing apart in their overall pay in the past four decades.

The backdrop for all of this is, of course, that the wages of non-college graduates have performed so poorly on average, while the highly educated have seen their pay soar. But we should be careful not to muddle this with the questions of regional inequality. If we think a healthy economy is one where lagging places are catching up with leading ones, a weaker urban wage premium is something to welcome, not something to lament.

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