What has happened over the past 40 years in the United States, particularly in cities?

It is well known that the US has experienced a large increase in income inequality, which, in my view, is one of the biggest problems of the US economy. At the same time, there has been an increase in neighborhood segregation, especially in larger cities: the rich are more and more concentrated in rich neighborhoods and the poor in poor neighborhoods. Alessandra Fogli of the Federal Reserve Bank of Minneapolis and I document a strong correlation between inequality and residential segregation.

The data show that cities with more segregation have a bigger education gap between the children of rich and poor families—and have less intergenerational mobility, which measures how hard it is to become rich if your parents are poor. In rich neighborhoods, it’s easier for kids to get a good education, and the return on education is higher. There are better schools, parents invest more in after-school activities, and there are stronger peers. This means that segregation amplifies inequality. At the same time, inequality increases segregation because richer people are happy to pay more to live in better neighborhoods.

Is the American dream dead?

It is definitely hurting. To keep it alive, policy makers need to give poor kids the opportunity to get a good education. The American dream provides a powerful motivation for people to invest in education, which is the best strategy to reduce inequality.

Veronica Guerrieri is Ronald E. Tarrson Professor of Economics at Chicago Booth.

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