as the earnings of poor - gsb.columbia.edu matter... · fact that many neighborhoods in america’s...

Christopher J. Mayer

Economist, Federal Reserve Bank ofBoston. The author wishes to thankKathy Bradbury, Jersey Kling,Yolanda Kodrzycki, and Bob Triest forhelpful com~nents, and Margaret Enisfor excellent research assistance. Anyerrors, of course, are the author’s.

I n recent years, much attention has been paid to the growing gapbetween the earnings of Americans at the top and at the bottom of theincome distribution, as reviewed by Kodrzycki (1996). As the earn-

ings of poor Americans have fallen behind, these households have alsobecome increasingly isolated from the places where middle-class andwealthy Americans live. The growth in inequality by location, however,has received much less attention than inequality by earnings, despite thefact that many neighborhoods in America’s inner cities have becomecrime-ridden areas where few households of any race or income classwould choose to live.

As segregation by income has increased, racial segregation hasdeclined only modestly, suggesting that poor black children still grow upin locations that give them little chance to succeed. One study ofWashington, D.C., found some particularly striking results. As comparedto whites under the age of 14, black youth in the District of Columbia livein neighborhoods that have 11 times the rate of AFDC use, seven timesthe rate of illegitimacy, six times the rate of drug use and arrests, twicethe rate of high school dropouts and long commutes, and a slightly higherrate of violent crime (Galster and Mikelsons 1995). While Washington,D.C., may be an extreme example, blacks in many other cities suffer fromsimilar problems.

In the academic literature, the importance of location in labor marketoutcomes was first recognized in a series of articles and books that lookedat the impact of racial discrimination in the housing market on theearnings of blacks. Developed by Kain (1968), the concept of "spatialmismatch" argues that housing discrimination confines blacks to a fewcentral city neighborhoods where jobs have become increasingly scarcebecause employers have relocated to the suburbs. Written almost 30 yearsago, Kain’s article describes conditions that still exist today: growingsuburbanization, continuing evidence of differential treatment in thehousing market (see Fix and Struyk 1992; Turner 1992), and racial

segregation that, while declining, is still extraordinar-ily high (Farley and Frey 1993; Harrison and Weinberg1992).

Researchers have also contended that the segre-gation of the poor h~ inner-city ghettos has otherserious consequences for residents beyond lack ofaccess to jobs, including the lack of positive rolemodels, concentration of crime, negative peer effects,and poor schools. Wilson (1987) has argued thatreduced discrimination against blacks in the housingmarket has had devastating consequences for theremaining residents of inner-city ghettos, as middle-class blacks increasingly have gone to the suburbs,leaving behind neighborhoods with fewer and fewerpositive role models. Wilson and others attribute

As the earnings of poorAmericans have fallen behind,

these households have alsobecome increasingly isolated

from the places wheremiddle-class and wealthy

Americans live.

much of the initial decline in many inner-city neigh-borhoods to the reduction in urban manufacturingjobs, which previously provided good-paying jobs tolow-skilled workers.

This paper will discuss evidence from a variety ofsources exploring the impact of location on the earn-ings of American households. Although many ofthe studies have flaws, the preponderance of evi-dence suggests that location does matter. In particular,spatial segregation by income is having an increas-ingly detrimental effect on those at the bottom of theincome distribution. The Gautreaux program in Chi-cago provides especially strong evidence on this sub-ject. As a result of a Supreme Court consent decreein 1976, families on the waiting list for public hous-ing were assigned randomly to apartments in primar-ily white, middle-class suburbs or to units in thecity of Chicago. Subsequent tracking of a sample ofthe Gautreaux participants indicates that those whomoved to the suburbs were more likely to be em-ployed than those assigned to city homes. Further-more, the children of movers to the suburbs per-

formed better in school and had a higher rate ofcollege enrolhnent (Rosenbaum and Popkin 1991;Rosenbaum 1995).

This paper begins by summarizing recent trendsin segregation by race and income, including datafrom the Current Population Survey showing that therelative concentration in central cities of residents inthe bottom quintile of the income distribution contin-ues to grow, while the relative proportion of minori-ties in the inner cities remains flat or is modestlydeclining. Next, the paper explores reasons for thecontinuing racial and income segregation, noting thatrecent evidence shows that racial discrimination con-tinues, but that such discrimination is not a completeexplanation of recent trends.

The second part of the paper explores the impactof spatial isolation on residents of poor neighbor-hoods. The summary focuses on the most influentialarticles and most recent evidence on this subject. Someof the literature provides general evidence on theimpact of location; other studies are more targeted,testing for the existence of spatial mismatch or neigh-borhood and peer effects. The final section of thispaper offers some conclusions.

I. Changes in Segregation byRace and h~come

For more than 30 years, researchers have docu-mented that blacks live in significantly more segre-gated locations than most ethnic groups. Taeuber andTaeuber (1965) and Duncan and Duncan (1955, 1957)showed that blacks lived in cities with severe segre-gation during the 1950s and 1960s, and that manyneighborhoods were transformed from white to blackin a relatively short period of time. After the riots ofthe late 1960s, the Kerner Commission warned thatthe nation was becoming divided "into two societies;one largely Negro and poor, located in the centralcities; the other, predominantly white and affluent,located in the suburbs .... " (See Farley and Frey 1993for a more complete description of the historicalcontext of discrimination.)

Because of the history of racial discrimination inthe United States, most research in the past 30 yearshas looked at segregation by race, as opposed tosegregation by income. More recently, however, re-searchers have recognized that some of the problemsassociated with segregation (peer and neighborhoodeffects, for example) are more closely related to pov-erty than to race. Most of the research summarized

May/June 1996 New England Economic Review 27

in this section refers tosegregation by race.However, the inclusionof a smaller number ofpapers on income segre-gation does not implythat segregation by in-come is unimportant;it is just less well re-searched. This point isparticularly relevant be-cause of the evidencefrom the last two de-cades that income segre-gation is rising, whileracial segregation is de-clining.

Linkiltg Segregationby Income and Raceto Trends in IncomeInequality

Figure 1

Ratio

13

11

I0

Ratio of Fanlily hlconle at the 90th Percentileto Fanlily hlconle at the lOth Percentile

/_

9 19 4 I 68 1 70 19 2 19 4 1976 19 8 19 0 1982 19 4 1986 1988 19 0 ~992

Sotnce: Curfenl Population Stlfvey data, 1964 Io 1994. except 1969 and 1988. which a~e intelpolated.

Changes in segre-gation by income and byrace can be linked to thewell-documented trendof rising income inequality. Figure 1 displays the ratioof the median incomes of families in the highest andlowest quintiles of the income distribution (that is, the90th and 10th percentiles) from 1964 to 1994.~ Thefigure shows that income inequality began to rise inthe mid-1970s.

At the same time that income inequality hasincreased, poor families (those in the bottom quintile)continue to be disproportionately located in centralcities. Figure 2 looks at U.S. families living in metro-politan statistical areas (MSAs) and compares thecentral city concentration of families in each incomequintile to the central city concentration of all fami-lies.-~ In 1964, an American family in the bottomquintile of the income distribution was about 1.2 timesas likely to be living in the central city as the average

~ These data were obtained from the March Supplement of theCurrent Population Survey. The definition of families used herediffers slightly from that of the Census Bureau in that the familydata in this section include siugle individuals as well as traditionalfamilies (two or more related persons living together).

2 Since the 1960s, the perceutage of families living in an MSAhas beeu rising, while the percentage of MSA families living in thecentral city has been steadily declining.

family. That number has risen steadily over time, to ahigh of ahnost 1.4 by 1994. By comparison, families inthe highest two quintiles have been moving out ofcentral city locations.

While urban families at the bottom of the incomedistribution have always disproportionately residedin central cities, this pattern has become more pro-nounced in the last three decades. Spatial segregationby income has trended upward since the 1960s, wellbefore the aggregate income distribution began wid-ening. This suggests that changes in the income dis-tribution explain only a part of the trend towardsgreater segregation by income. Indeed, the timing isconsistent with causation running from spatial incomesegregation to increasing income inequality ratherthan the reverse. To the extent that the harmful effectsof concentrated poverty have a lagged response or aminimum threshold (Crane 1991), rising income seg-regation may well have a role to play in explaininggrowing income inequality. Alternatively, changes inunderlying factors such as the loss of manufacturingjobs (particularly in the inner city) may have an effecton both rising income inequality and spatial segrega-tion by income.

28 May/June 1996 New England Economic Review

Figure 2

Central City Concentrations of the Family Income QuintilesMSA Residents

Second Quintile

Middle Quintile

Highest Quintile

1964 1966 1968 1970 1972 1974 1976 1978 1980 19 4 1986 19 8 19 0 1992

a Calculaled as the cenlral ciW percentage of families in a given income quintile divided by the cenlfal cily pelcenlage ol all families.Source: Cu[lenl Population Su[vey data, 1904 to 1994, except 1969 and 1988, which ai’e inteipolaled,

Figure 3 presents similar data on the central cityconcentration of blacks. After an initial rise in the1960s, the relative concentration of blacks in thecentral city showed no consistent trend throughoutmost of the 1970s and fell slightly in the late 1980sand early 1990s. This pattern suggests that blackshave been moving out of the central city at roughlythe same rate as all households. However, blackfamilies are still very heavily concentrated in thecentral city. The average ratio of concentration ofblacks (between 1.6 and 1.7) is much higher than theaverage ratio of concentration for families in thebottom quintile of the income distribution (less than1.4), although the ratios are moving closer together.The locational pattern of black families is describedin more detail in Figure 4, which shows the changeover time in central city concentration of blacks, byincome quintile. Consistent with the observations ofWilson (1987), high-income blacks have been leavingthe central cities at above average rates since thelate 1960s. Even so, the relative concentration of high-income blacks in the central city remains about 30percent above the central city concentration of allAmerican families.

Racial Discriminationand Segregation byLocation

The large concen-tration of blacks in thecentral city is not sur-prising given the highdegree of racial discrim-ination that has per-sisted in the housingmarket for a long time.In prior decades, muchof the discriminationwas codified into law.Before the Congresspassed the Fair HousingAct of 1968, local ruleseffectively restricted blacksfrom locating in manycommunities. Prior caselaw even allowed de-velopers or owners towrite deed restrictionsthat prohibited blacksor other minorities fromliving in particular de-velopments or proper-

ties for as long as 99 years. Kah~ and Quigley (1975)showed that as a result of such discrimination, blacksactually paid lnore than whites for equivalent rentalhousing units, despite living in significantly worseneighborhoods.

Researchers have developed a variety of mea-sures to quantify differences in the segregation ofracial or income groups. The most common are theindex of dissimilarity--which measures the evennessof the distribution of a particular racial or incomegroup--and the index of isolation--which measuresthe extent to which members of a particular group areexposed to other members of the same group. (SeeMassey and Denton (1988) for a further discussion ofthese measures.) Because most data come from thedecennial censuses, these measures are usually de-fined based on differences in the racial or povertymakeup of census tracts (areas of approximately 4,000residents).3

3 To the extent that census tract boundaries cross actual neigh-borhood boundaries, these indexes could underestilnate the extentof segregation, by nsing data for tracts that are more racially mixedthan the underlying neighborhoods.


Figure 3

Relative Concentration of Blacks in the Central CityMSA Residents

966 196~, 1970 1972 1974 197 £, 1978 1980 19S2 ] 984 1986 ] 9gg 19,90

The passage of fair housing laws in the 1960s andthe growth of the black middle class, which has beenongoing shace the end of World War II, led to a modestdecline in the extent of racial segregation (measuredby the index of disshnilarity) in the 1970s and 1980s.For example, Jakubs (1986) fotmd that segregationfell in a majority of all 318 SMSAs in the 1970s, al-though Massey and Denton (1993) have observed thatsegregation remained high in the metro areas with thelargest black populations. The data unambiguouslysupport the conclusion of modestly declining racialsegregation in the 1980s. Farley and Frey (1993) notethat between 1980 and 1990 the average index ofdissimilarity in 232 metropolitan areas with significantblack populations fell from 69 to 65, with the indexdeclining in 194 of those metro areas. Harrison andWeinberg (1992) and Massey and Denton (1993) findsimilar results for that decade.

Even though the Fair Housing Act of 1968 hasbeen on the books for more than 25 years, variousrecent sh_~dies have found evidence that minoritiesare still treated differently when acquiring housing.Evidence of discrimination includes studies of lend-ing patterns (redlining), mortgage approval, and thesearch process for buying or renting a home. The bulk

1991

of these studies supportthe hypothesis that dis-crimination limits themobility of minoritiesand in many cases re-stricts their choice oflocations and makessearch more costly. (SeeFix, Galster, and Struyk1992 and Yinger 1993for an overview of thisliterature.) Such dis-crimination could ex-plain the observed highlevels of racial segrega-tion.

Probably the moststriking evidence re-garding unequal treat-ment of mh~orities comesfrom a pair of nationalhousing audits con-ducted in 1977 and 1989.(Turner 1992 and Yinger1992 present a moredetailed description ofthese audits.) In both

audits, pairs of testers, one minority, the other white,were sent to investigate randomly chosen housingunits that were advertised in major newspapers. Thetesters were given identical backgrounds and incomes(in some cases the minority testers were actually givenslightly higher incomes) and sent out to look forshnilar units. The testers recorded whether or not theywere shown the advertised unit, as well as the numberof other similar units they were offered. In the 1989study, testers also documented the neighborhoodcharacteristics of the units they were offered.

The 1989 audit showed that blacks receive sometype of differeutia! treatment in buying or renting ahome more than one-half of the time (Turner 1992).The incidence for Hispanics was about one-thirdlower than for blacks. While the most extreme type ofdiscrimination--the refusal of the agent to do businesswith the minority home seeker when units wereavailable for the white tester--was experienced by theminorities in less than 10 percent of the cases, lesssevere adverse treatment was more common. Forexample, black testers were shown between 20 and 25percent fewer units for sale or rent than white testers(Yinger 1992). In addition, blacks often received fewercredit offers on sales units and worse terms and


conditions for rentals,including a higher rentor security deposit andfewer offers of specialterms (such as onemonth’s free rent). Inmore than 20 percent ofthe audits, blacks andHispanics were shownhouses in neighbor-hoods with a higherpercentage of minorityresidents, lower housevalues, or lower in-comes, although themagnitude of the differ-ences was fairly small.Finally, units for sale inminority areas were lesslikely to be advertisedin major newspapers.

Although the 1989results are striking, theyappear to be less severethan those found in the1977 national audit andin a smaller 1981 audit

Figure 4Central City Concentrations of Black Families

in the Various Family Income QuintilesMSA Residents

18

1~6

14

1.2 I1964

.~" ~ Second Quintil~

’,;Y Highest Quintile

1966 1968 1970 19 2 19 4 1976 1978 1980 1982 1986 1988 1990 1992

Calculated as the central city percentage of black families in a glveri income quln!lle dWlrJed b’/the central clly percentageof atl farn~hesSource: Current Population Sur,,ey data. 1964 to 1994. exceDl 1969 and 1-088. which are mterlpolated

conducted in Boston. In particular, blacks were muchmore likely to be told that the unit they were inquiringabout was unavailable in 1977 than in 1989 (Turner1992). In the 1981 Boston audit, blacks were shown 30percent fewer units than comparable whites (Yinger1986).

In addition to discrimination in the search pro-cess, blacks also face impediments to getting credit.Munnell et al. (1996) gathered data on a large numberof 1990 mortgage applications in Boston, includingvirtually all of the information from the mortgageapplication. Even controlling for differences in ob-served personal attributes, residence location, andlender, the authors still found that a black applicantwith average attributes would face a rejection proba-bility 8 percentage points higher than a white appli-cant with otherwise identical attributes. While Yezer,Phillips, and Trost (1994) have criticized the conclu-sions of Munnell et al. because of the specificationused in the analysis, their criticism is a theoreticalpoint that cannot be resolved with the existing data.Thus, the Munnell study is the most complete lookto date at racial disparities in the mortgage accept-ance process, and it provides convincing evidencethat minorities are treated differently when seeking

a mortgage. (See Yinger 1993, Berkovec et al. 1994, andBrowne and Tootell 1995 for more detailed discus-sions of the evidence relating to mortgage discrimina-tion.)

The net conclusion from most of this literature isthat minorities continue to face discrhnination in thehousing market, although disparate treatment appearsto be lessening. The recent reduction in discriminationis likely linked to the modest decline in racial segre-gation noted in the previous section.

Segregation by Income

More recently, researchers have begun to mea-sure spatial segregation by income as well as by race.While racial segregation in the nation’s largest citieshas decreased since 1970, income segregation hasgrown, as middle-class households of all races con-tinue to leave the central cities to live in the suburbs.Abramson, Tobin, and VanderGoot (1995) show thatthe mean value of the index of dissimilarity for thepoor (calculated for census tracts within the MSA) inthe largest 100 MSAs rose from 32.9 in 1970 to 34.8 in1980 to 36.4 in 1990, an increase of 11 percent over thetwo decades. Massey and Eggers (1990) use a larger


number of h~come groups and get somewhat smallerindex values for the 1970s, but a similar rate of change.

Of particular interest to researchers exploringincreased sorting by income is the possibility that theexodus of middle-class households from the innercities has left the remaining poor residents "sociallyisolated" (Wilson 1987) with fewer positive influences(successful peers and role models, access to i~fformalemployment networks, and so on) and more socialproblems (such as crime and drugs). In fact, tlieevidence suggests that an increasing number of poorresidents have indeed become isolated in areas with avery high percentage of poor neighbors. Using a

The exodus of middle-classhouseholds from the inner citiesmay have left the remaining poor

residents "socially isolated"~vith fewer positive influences

and more social problems.

sample of the 100 largest cities, Kasarda (1993) showsthat the share of the poor living in tracts with apoverty rate over 40 percent increased from 16 to 28percent between 1970 and 1990, while the percentageliving in tracts with a poverty rate exceeding 20percent rose from 55 to 69 percent. Jargowsky andBane (1991) found slightly lower increases in the1970s, using a smaller sample of cities.

II. Does Location Matter? And If So, Why?The overall trends described in the previous sec-

tion suggest that poor Americans have suffered adouble blow in the last two decades: decreased rela-tive incomes combined with rising segregation. Poli-cy-makers might wonder, however, whether the in-crease in segregation by income presents an additionalbarrier to raising the living standards of those at thebottom of the income distribution. This section sum-marizes research considering the implications of in-come and racial segregation. The first subsection pre-sents evidence suggesting that segregation doesmatter for the labor market outcomes of individuals,while the next two subsections present evidence re-

garding the specific hypotheses of spatial mismatchand peer and neighborhood effects.

The Relationship bet~veen Income Segregationand Labor Market Outcomes

Probably the most provocative evidence suggest-ing that location matters comes from the Gautreauxprogram in Chicago. As a result of a Supreme Courtconsent decree in 1976, families on the waiting list forpublic housing were given vouchers and assignedrandomly to apartments in primarily white, middle-class suburbs or to nnits in "revitalized" neighbor-hoods within the city of Chicago. Program participa-tion ~vas mostly a matter of luck, although familieswith more than four children, large debts, a history oflate rent payments, or apartments showing evidenceof physical abuse were excluded. Such exclusion cri-teria never affected more than 30 percent of otherwiseeligible residents. Once relocated, participants re-ceived little special support to help them adjust totheir new communities.

Subsequent tracking of a sample of tlie Gautreauxparticipants shows that the suburban movers faredbetter than city movers in many dimensions (Rosen-baum and Popkin 1991; Rosenbaum 1995). For exam-pie, 74 percent of suburban movers who were em-ployed pre-move were also employed post-move,compared to 64 percent for movers to a city location.In addition, 46 percent of previously unemployedsuburban movers found jobs, versus 30 percent of citymovers. Living in the suburbs had little effect onaverage hours or wages. More striking, however, wasthe impact of moving to the suburbs on the children ofGautreaux participants. A 1982 survey found thatGautreaux children had managed to achieve similargrades in suburban schools, despite higher standards.A follow-up survey in 1988 found that 94 percent ofthe children of suburban movers attended college orwere on a college track, compared to 45 percent of citymovers’ kids. Of those not in college, 41 percent ofcity-mover children were employed full-time, versus75 percent of suburban-mover children.*

Although the Gautreaux program was fairlylarge, placing over 5,000 families since 1976, the sam-ples used in these studies of the program were small(342 adults and 98 children), leading to the possibilityof selection bias, particularly because researchers were

4 The differences in means between city and suburban childrenwere significantly different from each other with a p-value of at least0.90,


unable to contact more than 40 percent of the ran-domly selected households. Nonetheless, the Gaut-reaux evidence is the closest that social scientists havecome to an experiment that randomly allocates house-holds to different neighborhoods.

Nelson and Edwards (1993) explore the hypothe-sis that to the extent that minorities face discrimina-tion in finding and acquiring housing in better neigh-borhoods, they should be less likely to move out ofghettos. They use data from the American HousingSurvey to examine flows of households to and frompoor zones in 10 cities. They find that blacks are lesslikely to move out of poor areas than whites, evencontrolling for other h:dividual characteristics. In Chi-cago, for example, about 70 percent of blacks wholived in a poor zone remained in a poor zone fiveyears later, while the comparable figure for whiteswas only 50 percent. In addition to race, however,income and neighborhood of origin were important inpredicting mobility, suggesting that factors other thanracial discrimination are also important in under-standing neighborhood composition. Furthermore,the zones in this study were about 25 times larger thancensus tracts, so these result may understate barriersto mobility. Nonetheless, Nelson and Ed~vards’ find-ings suggest that poor minorities face significant bar-riers to moving, even when the potential gains aresubstantial.

Most of the research that looks at the problemsassociated with racial segregation does so within asingle metropolitan area, and Cutler and Glaeser(1995) argue that such studies suffer from seriousbiases if they do not control for the endogeneity oflocation within the MSA. By looking at the impact ofMSA-level variables on individual outcomes acrossMSAs, Cutler and Glaeser claim that they can bettertest the hypothesis that the reduction in housingchoice associated with discrimination hurts all minor-ities, regardless of where they live. In particular, withthe exception of Gautreaux, most existing within-citystudies do not control for sorting (rich people livetogether by choice, rather than becoming rich becauseof their neighbors), within-MSA mobility (suburbanminorities may be a selected sample of all minorities),or between-MSA mobility (talented minorities avoidsegregated MSAs). To address these problems, Cutlerand Glaeser use youth observations from the 1990Census Public Use Micro Sample to estimate whetherblacks fare worse in segregated MSAs. They presentboth OLS and 2SLS estimates, instrumenting for thedegree of segregation within a MSA and for theresidential locafion,s

They find that blacks in metropolitan areas withmore segregation are less likely to graduate from highschool, while they are more likely to be idle or to be ateenage mother and to have lower earnings. (Galster1987 also estimates a simultaneous equations modeland finds that segregation has a negative impact onvarious measures of black welfare.) These results holdeve:: when controlling for whether the individuallives in a central city, suggesting that segregationhurts all blacks in a metropolitan area, regardless ofwhether they live in the city or suburbs. Cutler andGlaeser also included some specific measures ofneighborhood spatial isolation and peer influences,but these measures did not explain a large part of thesegregation effect, possibly because of the large size ofthe "neighborhoods" involved (approximately 100,000residents).

O’Regan and Quigley (1995) also find evidence ofadverse effects of spatial isolation on teenage elnploy-ment using a sample of at-home youth from the 1980and 1990 Public Use Micro Samples. In the first stage,the authors estimate a logit model of employment onindividual characteristics (except race), including thetype of household, whether a parent is working, andwhether the individual lives in a central city. Thesecond stage involves regressing the predicted em-ployment probability on individual race dummies andon MSA measures of economic activity, employmentcomposition, and indexes of exposure to whites andthe poor. Both exposure measures are highly signifi-cant. The coefficients suggest that reduced segregationby race or poverty would have a positive hnpact onblack and Hispanic youth employment, but a negativeeffect on white employment. The latter result is ex-plained by the fact that reduced segregation ~vill resultin whites having increased exposure to the poor andto minorities who have fewer jobs and thus worse peereffects.

Another set of provocative findings showing theimportance of location involves the labor market per-formance of recent immigrants into the United States.Previous evidence had suggested that the perfor-mance of children of recent immigrants depends notonly on their parents’ skills, but also on the averageskill levels of their ethnic group (Borjas 1992 and

5 The set of instruments includes variables relating to the MSAof previous residence, plus the degree of segregation and thenumber of governments in 1962, the percent of local revenuereceived from intergovernmental transfers, and the number ofrivers between and within the MSA. Cntler and Glaeser suggest thatthe latter instrument is correlated with segregation because a largernumber of communities likely leads to greater sorting.

May]June 1996 New England Economic Review 33

1994). However, such recent immigrants often live inhighly segregated neighborhoods, so the effect attrib-uted to ethnic capital might actually be a neighbor-hood effect. Borjas (1995) tests for separate neighbor-hood and ethnic capital effects using data from thepublic use file of the 1970 U.S. Census and the Na-tional Longitudinal Survey of Youth. He finds evi-dence of very strong neighborhood effects, even con-trollh~g for other factors, but a much smaller impactof ethnicity. In fact, ethnicity matters only for personswho live in segregated neighborhoods with a largepercentage of persons from the same ethnic back-ground.

The above results provide significant evidencethat segregation continues to affect the labor marketoutcomes of minorities and immigrants and that mi-norities face impedhnents to moving, but these resultsdo not help to identify the mechanism through whichsegregation has these effects. The next subsectionsexplore specific hypotheses about the impact of segre-gation, including spatial mismatch and peer andneighborhood effects.

Spatial Mismatch and Jobs

Kain’s original paper on spatial mismatch (1968)began a long literature that has explored the labormarket implications of racial discrimination in thehousing market. (The spatial mismatch hypothesisstates that housing discrimination confines blacks toliving in a few central city neighborhoods, where jobshave become increasingly scarce because employershave relocated to the suburbs.) Using data from De-troit and Chicago in 1952 and 1956, Kain found thatrestrictions on the residential choice of African-Amer-icans reduced non-white employment in these citiesby 9,000 and 24,600 jobs, respectively. Over the next 22years, more than two dozen papers were written insupport of, or arguing against, spatial mismatch.While research on this topic slowed in the late 1970sand early 1980s, interest has recently grown moreintense as America’s urban problems receive greaterattention.

Several recent papers have surveyed the literatureon spatial mismatch and come to very different con-clusions. Jencks and Mayer (1990b), for example, findthat the evidence against spatial mismatch is as com-pelling as the supportive evidence, suggesting that"support [for the idea that job proximity increases thesupply of black workers] is so mixed that no prudentpolicy analyst should rely on it." Kain (1992), Holzer(1991), and Ihlanfeldt (1992), on the other hand, find

significant support for spatial mismatch, relying onmore up-to-date research as well as taking a morecritical view of previous papers. As Ihlanfeldt (1992)notes, Kain’s spatial mismatch theory is actually threeseparate hypotheses: 1) residential segregation affectsthe location of jobs that blacks obtain; 2) segregationdecreases aggregate black employment; and 3) thedecentralization/suburbanization of jobs magnifiesthe effect of residential segregation.

Much of the subsequent empirical debate overspatial mismatch turns on measurement issues, which

The spatial mismatch hypothesisstates that housing discriminationconfines blacks to living in a fewcentral city neighborhoods, where

jobs have become increasinglyscarce because employers have

relocated to the suburbs.

are briefly summarized here. For example, many pa-pers compare the earnings of blacks in urban andsuburban neighborhoods, despite the possibility thatsuburban blacks are a selected salnple of all blacks inthe metropolitan area (even controlling for observableindividual characteristics). In fact, the endogeneity oflocation is a problem that few authors address di-rectly. Several recent papers attempt to avoid theproblem by restricting their samples to at-home youth,arguing that a youth’s residence is likely chosen byolder members of the household. Such papers, how-ever, suffer from the additional problem that, foryouth, the choice between work and school is alsoendogenous. In addition, many researchers treat allsuburban locations the same, despite the observationthat suburbs with large black populations in manyMSAs are significantly different from white suburbsand have poorer access to jobs. Most papers also usea general measure of residential segregation, as op-posed to a more complicated lneasure that takes intoaccount the relative locations of black residents andpotential employers.

Probably the most well-known and controversialpaper that finds evidence against spatial mismatch isEllwood’s (1986) study of Chicago youth employment.Ellwood presents several different types of evidence,


all of which suggest that location has little effect onblack employment rates. First, he regresses censustract employment rates on the tract’s racial make-upplus three measures of job access, finding that theaccess variables are insignificant and have little effecton the significant negative coefficient for percent blackin tract. Even including neighborhood fixed effectsdoes not change the coefficient on percent black. Otherevidence against spatial mismatch comes from Ell-wood’s finding that the "labor market outcomes forblacks on the West Side ghetto are remarkably similarto those in the South Side, in spite of the dramatic

Interest in the spatial mismatchhypothesis has recently grown

more intense as America’surban problems receive greaterattention. Much of the debateturns on measurement issues.

differences in the proximity to jobs." Finally, he showsthat differences in employment rates for blacks andwhites within the same neighborhood are the same asthe relative job differences by race for youth livingacross town. Ellwood concludes that racial discrimi-nation in the labor market, rather than residentiallocation, explains differences in employment acrossdifferent neighborhoods. ("Race, not space, remainsthe key explanatory variable.")

Several authors have criticized Ellwood’s findingson a variety of grounds. Leonard (1986) suggests thatEllwood’s measures of job accessibility are unreliablebecause of the small sample sizes in the Chicago AreaTransportation Study. Ihlanfeldt (1992) notes that theuse of aggregate census tract data, rather than indi-vidual observations, might bias the coefficients onaccessibility towards zero. Kasarda (1989) presentsevidence that job accessibility really does not differbetween the South Side and the West Side ghetto. Healso makes the argument that the similarity of relativeblack-white employment patterns in different neigh-borhoods can be explained by differences in the timingof job losses in the two neighborhoods.

More recently, Engberg and Kim (1995) presentevidence suggesting that place effects are minimal forworkers of all education levels, using a sample ofwhite men in Pittsburgh. They use a non-parametric

selection lnodel to try to separate place and personeffects and assume that highly educated white menface no barriers to moving. Their results suggest thatthe increased segregation by income may have littleeffect on the labor market outcomes of white low-skillworkers. The study does not address employmentoutcomes for black workers, who may face greaterbarriers to moving.

On the other side, several recent papers havefound evidence in favor of spatial mismatch, lhlan-feldt and Sjoquist, together and separately, have writ-ten a series of papers that combine data on black andwhite youth from the 1980 Census Public Use MicroSample with local measures of job accessibility, toshow that job accessibility is strongly correlated withblack youth employment prospects. In the Philadel-phia MSA, they show that mean travel time for whiteand black youth in 26 regions is related to the proba-bility of employment for these groups (Ihlanfeldt andSjoquist 1990). In addition, the authors show thatrelative differences in mean travel times explain asignificant portion of the difference between white andblack employment rates. Other regressions extendthese results to Chicago and Los Angeles, although thedata are not as good.

Ihlanfeldt (1992, 1993) expands on this researchby creating separate estimates for Hispanics, as wellas for youth in various other income and locationcategories in 50 MSAs. Among other things, he findsthat the relationship between job access and employ-ment probability is stronger for centTal city thansuburban youth. In fact, employment access had asignificant effect on job probability for all groupsexcept for youth located in smaller MSAs. Finally,Ihlanfeldt and Sjoquist (1991) study 43 SMSAs usingdata from youth living at home in the central city (tocontrol for endogenous location), and once again findthat mean travel time has a significant effect on theprobability of youth employment.

While Ihlanfeldt and Sjoquist’s research stronglysuggests that proximity to jobs matters, the authors donot fully control for endogenous location and do notallow for neighborhood effects that might be corre-lated with access to employment. To address the latterissue, Gabriel and Rosenthal (1995) estimate a fixed-effects model of commuting fimes, using data from the1985 and 1989 American Housing Surveys. They findthat black workers with a high school or collegedegree have longer commutes than similarly educatedAsian or white workers, even after controlling forneighborhood fixed effects and income. Surprisingly,for workers with less than a high school degree,


comn-tutes are similar for all races. The latter findingcontradicts the observations of the lnany other authorswho argue that low-skilled minority workers are thegroup most likely to suffer from long commutesbecause of barriers to mobility and the loss of inner-city manufacturing jobs.

The results from Gabriel and Rosenthal indicatethat neighborhood effects matter and that not control-ling for neighborhood fixed effects biases upward therace coefficient in the commuting time regressions.6(The coefficient on the black dummy variable in thecommuting time regressions was about one-thirdhigher in the specifications that did not include theneighborhood fixed effects.) Finally, Gabriel andRosenthal find that blacks are less likely than membersof other racial groups to move after four years, evencontrolling for other factors including the potentialgains associated with moving.

In contrast to lnuch of the previous literature,which generates variation in commuting times basedon cross-sectional data, Zax and Kain (1995) take anatural experiment approach and still find that jobaccess has a differential impact on black workers. Theystudy worker quit behavior in response to the move ofa large services industry employer from the Detroitcentral business district to the predominantly whitesuburb of Dearborn. The authors divided employeesinto "winners" (workers whose new commute wasshorter) and "losers" (workers with a longer com-mute). While few, if any, white "losers" quit their jobsin the three years following the move, many black"losers" left the company. As a result of the move, atleast 11 percent of the blacks who had worked at theprevious location quit.

Neighborhood and Peer Effects

While the spatial mismatch literature posits awell-defined hypothesis, neighborhood and peer ef-fects are more difficult to identify. Wilson (1987), forexample, argnes that low-income blacks have beennegatively affected by the exodus of middle-classblacks from ghettos since the 1970s. The loss of em-ployed households may hurt remah3ing residents of apoor urban neighborhood, through the loss of infor-mal job networks (Holzer 1987) and positive adult rolemodels and a deterioration in peer influences. Becauseof the high correlations among these factors withinindividual neighborhoods, their effects are very hardto identify separately. In addition, becanse individualstend to locate in neighborhoods inhabited by peoplewith similar characteristics, the direction of causality

between individual outcomes and neighborhood char-acteristics is unclear. Because of these problems, manyfewer papers have looked for separate evidence ofneighborhood and peer effects, and the evidence thatis available is much weaker than for spatial mis-match.7

Jencks and Mayer (1990a) survey the literature onthe impact of neighborhoods on five outcomes forchildren, including educational attainment, cognitiveskills, criminal activity, sexual behavior, and economicsuccess. They conclude that "there is no general pat-tern of neighborhood or school effects that recursacross all outcomes." Jencks and Mayer found onlyfive papers on labor market success and none hadresults that were reliable.

More recently, Crane (1991) finds evidence infavor of an "epidemic" theory of ghettos in which theindividual outcomes are related to neighborhoodquality, particularly for very distressed neighbor-hoods. Using data from the 1970 Census Public UseMicro Sample, he shows that as the percentage of"high status" residents (persons with a professionalor managerial job) decreases below a threshold of 10percent, the probability of a young person having ababy or dropping out of school increases sharply, evencontrolling for other individual characteristics. Tocontrol for endogeneity of residence location, he re-stricts the sample to at-home youth.~ One problemwith the study is that Crane tested 15 measures ofneighborhood quality (which presumably were lessstrongly associated with social problems) before us-ing the percentage of "high status" residents. In addi-tion, correlations between neighborhood characteris-tics and personal and parental attributes could furtherbias the results. (See Borjas 1995.)

Corcoran et al. (1991) do a better job of controllingfor family characteristics h~ their study of men’s eco-nomic status, finding that parental income, race, andparticipation in welfare programs play an importantrole in a son’s earnings. They obtain parental informa-tion from the intergenerational data in the PanelSurvey of Income Dynamics. Once parental attributes

6 The authors attribute the impact of the fixed effects oncommuting times to unobserved compensating differentials inneighborhood house prices and amenities.

7 This section reviews only papers that relate directly or indi-rectly to the impact of neighborhood factors on labor marketoutcomes. See Jencks and Mayer (1990a) for a survey of the muchlarger literature that explores the determinants of social problemssuch as teenage pregnancy, illegitimacy, and crime.

a These results are consistent across most racial groups andlocations, although the mean levels of the dropout and fertility rateswere much lower for whites in the sample than for blacks.

36 May/June 1996 New E~tgland Economic Review

are controlled for, however, only one of the neighbor-hood characteristics is significant--percent on welfare.The neighborhood characteristics are measured at thezip code level, and even the authors concede that zipcode level data are inadequate for this task. (See Borjas(1995) for evidence about the imprecision of zip codelevel neighborhood controls.)

Because individuals tend tolocate in neighborhoods inhabited

by people zoith similarcharacteristics, the direction ofcausality between individualoutcomes and neighborhoodcharacteristics is unclear.

Several recent papers have attempted to use aninstrumental variables approach to control for thesimultaneity between neighborhood and peer charac-teristics and (tmobserved) household attributes. Evans,Oates, and Schwab (1992) show the problem ~vithignoring the endogeneity of location and peers. Usingdata from the National Longitudinal Study of Youth,they estimate the probability of pregnancy and schooldropout for teenage women as a function of individ-ual and household variables, including the percentageof students in school who are disadvantaged. In asingle equation model, they find that the percentagedisadvantaged variable is highly significant and has apositive impact on the probability of pregnancy anda negative impact on the probability of staying inschool. Next the authors use a simultaneous equationsapproach, in which the percentage of disadvantagedstudents is estimated as a function of instruments thatinclude metropolitan area economic conditions.9 Thecoefficient on percentage disadvantaged becolnes in-significant h~ the pregnancy and dropout equationswhen run in the simultaneous equations framework.While the study can be criticized for its exact choice ofinstruments and a single peer variable, the resultsstrongly hint at the problem associated with the en-dogeneity of peers and neighborhoods.

Others find that neighborhood and peer effects donot disappear with suitable instruments for neighbor-hood effects. Duncan, Connell, and Klebanov (1994)argue that endogenous neighborhood choice could

actually lead researchers to underestimate neighbor-hood effects, if households with motivated parentschoose poor neighborhoods because of low houseprices. They use data from the Panel Survey of IncomeDynamics to estimate the impact of individual andneighborhood characteristics on the probability ofhigh school graduation, using the future neighbor-hood choice of the mother as an instrument for theneighborhood that the parents occupy while the chil-dren live at home. Such an instrument should avoidthe problem that parents may choose a neighborhoodin order to provide their children with better peers.The authors find a strong and significant neighbor-hood effect, which increases iu magnitude when theyuse instrumental variables.

Case and Katz (1991) use targeted survey data toseparate the effects of neighborhood and family at-tributes; they find strong evidence that both of thesefactors have an impact on the behavior of inner-cityyouths consistent with an epidemic model of neigh-borhood effects. They use data from a 1989 NBERsurvey of youths living in low-income neighborhoodsthat reports a variety of outcolne measures, includinglabor force/school status, criminal activity and druguse, church attendance, and parental status. The sur-vey also asks about the presence and demographicbackground of the parents and siblings, as well as therespondent’s current living arrangements. The esti-mated neighborhood effects are especially convincingbecause Case and Katz use a novel approach to controlfor the potential endogeneity of location. For example,if the dependent variable was whether or not a youthcommitted a crime last year, Case and Katz includethe predicted probability that the youth’s neighborscommitted a crime in the last year as an independentvariable. The predicted value is generated from theindividual characteristics of neighboring youths.

As suggested by the conflicting results listedabove, Aaronson (1995) shows that instrumental vari-able equations are very sensitive to the choice ofreasonable instruments. Instead, he uses data fromsiblings who differ in age by at least three years, andwhose families move at least once, to estimate a modelof educational attainment in which family influencesare controlled for using fixed effects. The results showthat neighborhood effects remain ilnportant in predict-ing high school graduation even when family-specificfixed effects are included in the equation.

9 The authors show that the included instruments are corre-lated with percentage disadvantaged, but uncorrelated with thedependent variables in the second stage equations.

May/June 1996 New England Economic Revie~l, 37

As is clear from the papers just summarized,research on neighborhood and peer effects is lessdeveloped than that for spatial mismatch, and theresults are more ambiguous. In particular, few authorshave been able to identify the exact neighborhoodor peer variables that matter most. Recent researchshows promise, however, in controlling for the endog-enous choice of location, and a number of workingpapers suggest that neighborhoods and peers do mat-ter in explaining educational outcomes.

Even if parents make the choice of location for youth,the parents’ choice of location may be correlated withattributes of the parent that can have an independenteffect on the youth’s behavior. (For example, parentswho use drugs may live in neighborhoods with otherdrug users, but also have children who are drug users.Without controlling for parental drug use, researcherscannot separately identify the impact of neighbors’drug use on a youth’s drug use.) Finally, results forat-home youth may be difficult to generalize for thelarger population.

IlL Conclusions

Despite the attention paid to segregation over thepast 30 years, low-income and black households con-tinue to live in neighborhoods that are highly segre-gated. Trends in the 1970s and 1980s show that thetype of segregation is slowly changing, with segrega-tion by race gradually falling while income segrega-tion is rising. Racial segregation remains more pro-nounced than income segregation, and recent studieshave found that racial discrimination in the housingmarket continues to exist, although the types of dis-crimination are less severe than in the past.

The evidence presented in this survey stronglysupports the proposition that location matters in termsof labor market outcomes, particularly for householdswho live in distressed inner-city neighborhoods. Inaddition to the Gautreaux results, several studiesshow that minorities do worse in MSAs with moresegregation (or spatial isolation) and that ethnic neigh-borhoods play an important role in transmitting ethniccapital. The research is less clear, however, in identi-fying the exact mechanism through which locationaffects labor market outcomes. Commuting times ap-pear to be an important factor in explaining reducedemployment for black and Hispanic youth, and sev-eral authors have found that minority families facesignificant barriers to mobility. Neighborhood andpeer effects are harder to identify, especially becauseof the endogeneity of location and the strong correla-tions between various kinds of neighborhood prob-lems and individual and family characteristics.

Despite the large body of evidence, significantresearch questions remain unanswered. Future re-search should continue to look for better methods ofidentifying neighborhood and peer effects. Focusingexclusively on at-home youth presents several prob-lems yet to be addressed, including the choice of workversus school (which presumably depends on theavailability of jobs and the quality of local schools).

Trends in the 1970s and1980s show that the type of

segregation is slowly changing,with segregation by race

gradually falling while incomesegregation is rising.

While many studies have explored the reasons forand negative implications of segregation by race,significantly fewer papers have focused on segrega-tion by income. Very little evidence has been devel-oped about why this type of sorting has been risingfor the past 25 years. Given this trend, however, theproblems associated with the concentration of pov-erty, including access to education, neighborhood andpeer effects, and mobility, should receive significantlymore attention in the future.

Finally, most of the evidence regarding spatialmismatch comes from studying individuals, not firms.Even if individuals face barriers to mobility (such ashousing market discrimination and information prob-lems), firms could choose to locate closer to minorityor impoverished neighborhoods if employers per-ceived profitable opportunities. Yet the establishmentof enterprise zones to provide tax breaks for employ-ers who move to distressed inner city areas hasapparently failed to induce significant numbers ofemployers to respond. Research on the reasons thatemployers choose not to locate in inner cities mightsuggest policies that could help improve the coudi-tions for residents of the inner city.

Given current high levels of segregation, Ameri-ca’s urban problems are not going to disappear, and


h~stead they appear to be worsening. The researchpresented at this symposium will add to our under-standing of the problems associated with location. Thechallenge for policy-makers is to use this research to

design policies that address the needs of the innercities. Solutions to the problem of growing incomeineqnality must also address the problems posed bylocation.

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