What is the status of the American Dream today? | Guest Opinion

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Many have claimed that, in contemporary times, the American Dream — the idea that hard work and talent can lift anyone regardless of background — faces serious headwinds. The argument is that rising income inequality, entrenched residential segregation, and declining intergenerational mobility have made upward economic movement increasingly difficult, particularly for children born into low-income households and disadvantaged neighborhoods. To what extent are these claims valid?

Thought-provoking new research by the economist Alessandra Fogli and her colleagues sheds valuable light on the above question. These researchers examine the relationship between rising income inequality and residential segregation in American cities since the 1980s. They contend that these two phenomena are not merely correlated but actively reinforce each other through a feedback mechanism driven by neighborhood-level educational spillovers — ultimately suppressing intergenerational mobility and threatening the promise of economic advancement for lower-income families.

The research undertaken begins by documenting two parallel trends. First, income inequality, measured by the so-called Gini coefficient, rose steadily across US metropolitan areas from roughly 0.38 in 1980 to 0.44 by 2010. Second, residential segregation by income, captured through the dissimilarity index, increased from approximately 32 percent to 38 percent over the same period — meaning that a growing share of families would need to relocate to achieve an even income distribution across neighborhoods.

Significantly, both trends are more pronounced among families with children. Segregation for this group rose from 0.35 to 0.46, compared to 0.31 to 0.35 for childless families. The researchers also find a robust positive correlation between inequality and segregation both across time and across the 380 metropolitan areas in their sample, holding even after controlling for racial composition, industrial structure, and housing supply elasticity.

To explain these patterns, the researchers build what economists call a “general equilibrium overlapping-generations model” in which parents make simultaneous decisions about where to live and how much to invest in their children’s education. The central mechanism is a local spillover: the return to education is higher in neighborhoods where residents have higher expected future incomes. This spillover can represent better-funded public schools, peer effects, professional networks, or social norms that reward educational investment.

Because the spillover is complementary to both children’s latent productivity and education investment, wealthier parents and those with more talented children are willing to pay premium rents to access stronger-spillover neighborhoods. This produces income sorting in equilibrium. When inequality rises —  which is modeled as a shock to the skill premium — more families compete for the high-spillover neighborhood, driving up rents and pushing out lower-income families, even those with highly capable children. The result is a self-reinforcing cycle: greater inequality produces more segregation, which widens the spillover gap between neighborhoods, which in turn amplifies future inequality.

The model is calibrated to the average US metropolitan area in 1980, drawing on neighborhood exposure effect estimates — from the previous work of Harvard economist Raj Chetty and his colleagues — to discipline the strength of local spillovers. A one-time permanent shock to the skill premium replicates observed dynamics in both inequality and segregation remarkably well without further parameter adjustments.

Two counterfactual exercises quantify how much segregation contributed to rising inequality between 1980 and 2010. When families are randomly redistributed across neighborhoods after the shock, thereby eliminating sorting, the increase in inequality falls by 29 percent. When families are instead prevented from re-optimizing their residential choices, the reduction is 26 percent. The authors also find that segregation accounts for approximately 29 percent of the observed decline in intergenerational mobility over the same period, as measured by the rank-rank correlation between parent and child incomes.

The research under discussion also evaluates the Moving to Opportunity (MTO) program, which provided housing vouchers to low-income families in high-poverty neighborhoods during the mid-1990s. At its actual small scale, the program produced meaningful income gains for children who moved young, and the model generates an 18.5 percent income gain for voucher recipients’ children — close to the observed estimates.

However, when the researchers simulated scaling up the program, they found diminishing and eventually declining returns. As more poor families moved into the richest neighborhood, its local spillover weakened, rental rates increased, and some incumbent families migrated to intermediate neighborhoods. These general equilibrium effects steadily eroded the program’s benefits. Beyond a roughly 10 percent participation threshold, the income gain for voucher recipients’ children began to fall noticeably, suggesting that large-scale voucher programs face inherent limitations not captured by small-scale experimental evaluations.

For policy makers, this research makes a compelling case that residential segregation is not merely a byproduct of inequality but a powerful amplifier of it. Without addressing the feedback between neighborhood sorting and educational returns, policies targeting inequality in isolation may fall significantly short of their goals.

Batabyal is a Distinguished Professor, the Arthur J. Gosnell professor of economics, and the Head of the Sustainability Department, all in the Rochester Institute of Technology but these views are his own.