This paper investigates why the level of income inequality differs across U.S. cities. We also explore why some cities experienced faster increases in the level of inequality than others. Using the Decennial Census and the American Community Survey (ACS) from 1980 to 2011, we explore whether the disparities in the level and the changes in the level of inequality can be explained by MSA characteristics, including labor market conditions, skill distribution, residential mobility, racial concentration, industrial composition and unionization. We also examine how state level policies such as unemployment insurance benefits and minimum wage level is associated with income inequality.

Our findings shows that negative labor market conditions, concentration of skilled workers and racial segregation are positively associated with the level of income inequality. The level of inequality in these cities also tends to rise grow at a faster pace. While the minimum wage do not seem to have any association with income inequality, we find some evidence that the unemployment insurance benefit and percent of union members lower the increase in the income inequality.