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2 February 2022

Place-based policies and geographical inequalities

In most countries around the world, there are large disparities in wages, earnings and income between cities and regions. The chapter by Overman and Xu (2022) in the IFS Deaton Review of Inequalities offers an excellent overview of the geographical inequalities in the United Kingdom. Overman and Xu uncover vast differences in employment rates, education, earnings, incomes, gross value added per capita, and even self-reported happiness across UK regions. While they convincingly show that geographical inequality in the UK is relatively high by international standards, it is clear that the UK is not the only country with large geographical inequalities.

In the United States, geographical economic differences are at least as large. For example, the average hourly wage of a worker in Stamford, CT, is twice that of a worker with the same education and demographics in Flint, MI – a difference significantly larger today than in 1980. European countries also have significant geographical differences, although typically smaller than the ones observed in the UK and the US. In Germany, after conditioning on the same variables, the 2014 average wage in Munich was 43% higher than in Uelzen, a small city at the bottom of the wage distribution. This difference is significantly larger today than it was in 1985. Similar differences have been documented in France (Combes, Duranton and Gobillon, 2008), Spain (De La Roca and Puga, 2017), Italy (Boeri et al., 2021) and Japan (Keisuke, 2017). Geographical wage disparities appear to be associated, at least in part, with city size. In most countries, larger cities tend to enjoy higher wages than medium-sized cities, and medium-sized cities have higher wages than small cities (Glaeser and Maré, 2001; Rice et al., 2006; Combes et al., 2008; De La Roca and Puga, 2017; Keisuke, 2017; Dauth et al., 2022).

Unemployment and non-employment rates also vary enormously across cities and regions. Overman and Xu (2022) show that this is the case in the UK, with a clear north–south divide. In the US, variation in unemployment rates across labour markets at a moment in time is even larger and it rivals that of variation over the business cycle. The unemployment rate in Flint in 2008 was almost 15%, while the unemployment rate in Iowa City – located less than 500 miles from Flint – was only 2.6%. The 12 percentage point difference between these two cities is more than double the change in national unemployment rates observed over the course of the Great Recession (Kline and Moretti, 2013). Spatial differences in unemployment rates are not simply an artefact of differences in the average characteristics of residents but remain large even after controlling for an area’s demographics and average schooling.

Cite this as:

Moretti, E. (2022), ‘Place-based policies and geographical inequalities’, IFS Deaton Review of Inequalities,