The Effect of Local Fiscal Policies on Urban Wage Structure

While it has long been recognized that average wages vary strikingly across regions and urban areas, differences in the variance of wages remain relatively unexplored. In this paper we empirically examine differences in the extent and persistence of wage dispersion across urban areas. Using data from the 1980 and 1990 Censuses, we show that metropolitan area wage distributions vary, that the variation is substantial, and that it is not entirely accounted for by differences in the supply of workers with different skills or the size or geographic region of the city. We find that the differences in wage distributions across cities are highly persistent. We investigate whether there is a link between local fiscal policy and the degree of dispersion in the wage structure, and find evidence that such a relationship exists. Cities with higher overall taxes, fewer transfers from state and federal governments, and a greater share of spending on public health and community development appear to have higher levels of overall dispersion. In addition, we find that cities that rely more heavily on property taxes have greater dispersion in the lower half of the wage distribution, and cities with higher expenditures on education have more dispersion in the upper half.