Does size of local labour markets affect wage inequality? a rank-size rule of income distribution

Abstract

The questions addressed in this paper are: (i) does wage inequality increase with local population size, and if so, (ii) what are possible factors behind this increase? In a cross-section analysis of Swedish local labour markets using unique full population data, the article shows that urban scale, i.e. size of local population, has significant positive effects on wage inequality. Testing for potential explanations, labour market diversification, human capital, migration, age structure and employment are shown to be significantly associated with inequality. Given these effects, the article raises the question of how to understand and incorporate scale effects into models of long-term change in wage inequality.