This paper examines the interplay between residential choice, human capital investment, and production in a city composed of multiple communities where the acquisition of different skills is influenced by peer group effects. The equilibrium involves maximal self-segregation by occupation, while Pareto efficiency may require identical communities. The inefficiency can lead to entire "ghettos" dropping out of the productive labor force, and underemployment is more extensive when high-skill workers can isolate themselves from low-skill counterparts. The paper formalizes the links between residential and occupational choices, relating it to both local public finance and macroeconomic literature on human capital and skill acquisition. It highlights the importance of peer effects and local externalities in shaping the distribution of skills and incomes. The model is analyzed through a simultaneous choice game, focusing on steady-state occupational and residential distributions. The paper also discusses the implications of self-segregation on labor force composition and efficiency, and shows that the pursuit of segregation can be self-defeating, leading to a total shutdown of the productive sector.This paper examines the interplay between residential choice, human capital investment, and production in a city composed of multiple communities where the acquisition of different skills is influenced by peer group effects. The equilibrium involves maximal self-segregation by occupation, while Pareto efficiency may require identical communities. The inefficiency can lead to entire "ghettos" dropping out of the productive labor force, and underemployment is more extensive when high-skill workers can isolate themselves from low-skill counterparts. The paper formalizes the links between residential and occupational choices, relating it to both local public finance and macroeconomic literature on human capital and skill acquisition. It highlights the importance of peer effects and local externalities in shaping the distribution of skills and incomes. The model is analyzed through a simultaneous choice game, focusing on steady-state occupational and residential distributions. The paper also discusses the implications of self-segregation on labor force composition and efficiency, and shows that the pursuit of segregation can be self-defeating, leading to a total shutdown of the productive sector.