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An American Inequality Trap

For more than 30 years, the ratio of average black earnings to average white earnings has remained close to 0.6. Additionally, US cities have remained dramatically segregated by race. This paper provides a joint theory of pre-market skills and residential segregation for quantitatively studying these phenomena. It is established that the magnitude of racial and earnings sorting observed in US cities implies 70 percent of observed black-white inequality. While the mechanism posed is intricate, all of its three non-standard components are essential for permanent black-white inequality to arise in a steady state: neighborhood human capital externalities, house price differences across neighborhoods, and preferences over neighborhood racial composition.

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