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The "sorting effect" is to blame.
There’s a reason Silicon Valley is notoriously unequal—and it’s not just a matter of misconception or misplaced blame.
Between 1990 and 2010, the tech industry’s growth directly caused San Francisco and San Jose’s inequality to grow as well, according to the preliminary draft of a study conducted by researchers from Northwestern University and the University of Toronto. In fact, an analysis of cities across the US during the same time period showed a causal relationship between an increase in innovation and heightened inequality.
The researchers used the number of patents published within a city as a proxy for its innovativeness; they used the Gini coefficient, a standard measure for income distribution, to quantify inequality. By analyzing patent volume against local changes in income distribution, education level, and employment over the two decades, they were able to identify what they call the “sorting effect” as the primary reason why innovation leads to income segregation.
How does the sorting effect work? Because the knowledge economy is driven by the exchange of ideas, innovative companies tend to cluster together. Subsequently, to reduce commuting costs, highly educated, highly paid individuals working at those companies choose to live nearby. That causes low-income and high-income workers to separate into completely different regions of the city. A high concentration of high-income workers also leads to a demand for more expensive amenities, such as Whole Foods, yoga studios, and coffee shops. The gentrification amplifies property value increases and further pushes low-income individuals out.
The researchers concluded that, on average, 20% of the rise in income segregation in US cities can be explained by the rise of innovative activities. They also found that some cities demonstrated the causal relationship more than others. In San Francisco, for example, the tech industry accounted for nearly half of the city’s Gini coefficient increase from 1990 to 2010. In San Jose, it accounted for 58%. In New York, by contrast, it only accounted for 6%. (The study controlled for confounding variables, like changes in the economy and housing shocks.)
In discussions about inequality, people often focus on income gaps—the income differences between the rich and the poor—rather than income segregation. But Enrico Berkes, a economics PhD candidate at Northwestern and the study’s first author, says that segregation is often just as important, if not more, in determining a city’s quality of life.
“In America, a lot of public goods are funded at the local level, like education, safety, and so on,” he says. If high- and low-income people lived in the same neighborhoods, “I have this feeling that income inequality wouldn’t even be that bad for life in the city, as long as high-income people were paying for the provision of public goods for low-income people.” But when the groups segregate and live in completely different parts of the city, low-income residents lose access to the resources and other residential amenities that high-income residents can afford. Research has shown this segregation has significant impacts on education, health, and intergenerational mobility. “This seems to be a dimension that really matters for the life of people,” Berkes says.
Berkes identified a few ways cities can stymie the sorting effect. Thoughtful zoning laws, for example, could guide new companies to locate their offices in regions that may have beneficial impacts. Better public transit could also encourage employees of innovative companies to spread out more across a city.
As part of the study, for instance, Berkes and his colleague simulated what would happen if Amazon chose to place HQ2 in Chicago. They compared different scenarios based on the various locations offered in Chicago’s proposal. Each scenario inevitably increased income segregation to some degree, thanks to the influx of high-income workers, but one scenario—placing HQ2 near Chicago’s South Side, one of the city’s poorest regions—also generated “positive spillover effects” for the low-income residents.
“Innovative activities are responsible for a bigger and bigger share of the US’s GDP,” Berkes says. “At the same time, we know inequality and income segregation have also been increasing.” By understanding the casual relationship between the two, cities can create more effective policies to improve people’s lives.