for excellent research assistance, as well as Enrique Montes for expert data advice. This paper was written in part by Census Bureau staff. It has undergone a more limited review than official Census Bureau publications. All results were reviewed to ensure confidentiality. Any views, findings and opinions in the paper reflect the views of the authors and do not reflect the views of the U.S. Census Bureau.

In cross-sectional American census data, we document that isolated cities tend to have less wage inequality. To explain this correlation and other correlations between population and wages, we build an equilibrium empirical model that incorporates high and low-skill labor, costly trade, and both agglomeration and congestion forces. The model bridges the gap between the spatial inequality literature which abstracts from geography, and the economic geography literature which abstracts from inequality. We find that geographical location explains 9.2% of observed variation in wage inequality across American cities. In counterfactual experiments, we find that reductions in domestic trade costs benefit all American workers and decrease welfare inequality. We also examine the effects on inequality and welfare of both regional and national skill-biased technology shocks. We find that in larger cities wage inequality grows more than welfare inequality.

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