This paper examines the impact of increasing service sector employment and decreasing manufacturing employment on the distribution of income across communities on the urban-rural continuum. Changes in the differential distribution of industries and family income across this continuum have important consequences for local services, including education. Robust regression statistics were used to analyze census and Dun and Bradstreet data from 1970-80 for all 642 communities in New Jersey, New York, and Pennsylvania, excluding New York City and Philadelphia. The effect of increasing service sector employment on income distribution was mediated through increasing levels of female labor force participation and the position of the community in the urban hierarchy (based on population size and family income). As high-wage manufacturing jobs were lost, women increased their contribution to the local economy through employment in low-wage industries. The positive impact of increasing numbers of female workers on the community's position in the hierarchy was stronger in smaller communities. Communities with local economies dependent on the high-wage manufacturing sector lost position in the hierarchy. Despite the occurrence of economic growth in rural communities, discrepancies in the distribution of income between smaller and more urbanized centers increased, probably due to differential location of low-wage and high-wage service firms. However, the smallest and largest places experienced the greatest declines in income. Implications for economic development policy are discussed. This paper contains 26 references. (Author/SV)