Does It Pay to Live in Big(Ger) Cities? The Role of Agglomeration Benefits, Local Amenities, and Costs of Living

Abstract

This study approaches the question whether it “pays” to live in big(ger) cities in a three-fold manner: first, it estimates how city size affects worker productivity (agglomeration benefits) in Germany, based on individual-level wage data. Second, it considers whether productivity benefits translate into real gains for workers by taking local price levels into account. Third, it examines the role of amenities in explaining differences in real benefits across cities. The estimated elasticity for agglomeration benefits is around 0.02, implying that comparable workers in Hamburg (3 million residents) are about 6% more productive than in Recklinghausen (150 000). But agglomeration benefits are, on average, offset by higher prices, i.e. city size does not systematically translate into real pecuniary benefits for workers. Amenities, e.g. seaside access, theatres, universities, or “disamenities”, e.g. air pollution, explain – to a large degree – variation in real pecuniary benefits, i.e. real wages are higher in low-amenity cities.