Urban Wage Premium Research Articles

Determination of the urban wage premium in Ecuador

This paper aims to determine the urban wage premium in Ecuador. It estimates two wage equations with the nominal and real wage, using instrumental variables to control endogeneity. Four indicators are applied to measure up the urban premium: area, classification by size of a city, cantonal population, and number of firms per capita. The latter is used for the first time and proves to be a better measure to reflect the urban premium. The results show that workers located in metropolis and big cities earn wages 14% and 4% higher than those workers located in small towns, respectively. The wage elasticity is 0.03% with respect to cantonal population, and 0.06% with respect to the number of firms.

Agglomeration Effect of Skill-Based Local Labor Pooling: Evidence of South Korea

Since workplace skills present diverse dimensions of a worker’s ability, it has recently received renewed interest by researchers examining the growth of cities. The purpose of the paper explores the advantage of regional concentrations of workers specialized in different types of skills. Specifically, the analysis estimates the agglomeration effects of skill-based labor pooling on wage levels and wage growth in South Korea. To this end, it constructs skill-based labor pool indices for cognitive, social, technical, and physical skills at a provincial level. The indices show an uneven geographical distribution in varying degrees across four types of skills. The regression results indicate that the urban wage premium of skill-based local labor pooling varies according to types of skills. The greatest magnitude of benefit is incurred by workers in cognitive-skill-oriented occupations and moderate benefits are found in technical- and physical-skill-oriented occupations. An urban wage premium is non-existent in social-skill-oriented occupations. In addition, the wage growth model with job mobility shows that the urban wage premium immediately affects workers who change jobs and relocate to denser areas. As high-wage occupations earn higher wage premiums when workers in these occupations are concentrated, it supports patterns of the polarization of both skills and their effects.

Urbanization and Its Discontents

American cities have experienced a remarkable renaissance over the past 40 years, but in recent years, cities have experienced considerable discontent. Anger about high housing prices and gentrification has led to protests. The urban wage premium appears to have disappeared for less skilled workers. The cities of the developing world are growing particularly rapidly, but in those places, the downsides of density are acute. In this essay, I review the causes of urban discontent and present a unified explanation for this unhappiness. Urban resurgence represents private sector success, and the public sector typically only catches up to urban change with a considerable lag. Moreover, as urban machines have been replaced by governments that are more accountable to empowered residents, urban governments do more to protect insiders and less to enable growth. The power of insiders can be seen in the regulatory limits on new construction and new businesses, the slow pace of school reform and the unwillingness to embrace congestion pricing. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Disappearing Economic Mobility in U.S. Micropolitan Areas

A key driver of urbanization is the pursuit of economic opportunities in cities. One such opportunity is the promise of higher wages in larger cities, a phenomenon known as the urban wage premium. While an urban wage premium has been well-documented among U.S. metropolitan areas, little is known about its existence among micropolitan areas, which represent an important link between rural and dense urban areas. Here we measure the power law scaling coefficient of aggregate annual wages versus workforce for both U.S. metropolitan and micropolitan areas over a 35-year period. We take this coefficient to be the magnitude of the urban wage premium within a type of urban area and find the relationship is superlinear in all years for both area types. While both areas once had similar wage premiums, the premium in micropolitan areas has declined in the era of globalization while the premium across metropolitan areas has generally increased. This growing gap between micropolitan and metropolitan wage premiums is highly correlated with a divergence in voting behavior, with micropolitan voters having become increasingly conservative. Finally, we speculate that if urban dwellers respond to the COVID-19 crisis by migrating, the trends we describe may possibly change significantly.

Urban Wage Premium in a Labor Market with Informality

Urban Wage Premium in a Labor Market with Informality

The Earnings and Income Mobility Consequences of Attending a Historically Black College/University: Matching Estimates From 2015 U.S. Department of Education College Scorecard Data

This article considers the labor market consequences of attending a Historically Black College/University (HBCU). With 2015 U.S. Department of Education College Scorecard Data, we use a matching estimator to identify and estimate the treatment effect of HBCU attendance on median earnings, earnings relative to a high school graduate, and income relative to that of the household at the time of initial enrollment, 6 and 10 years after attendance. Our treatment effect parameter estimates suggest that once we account for the differential return to college majors, the urban wage premium, and the proportionality/dependence of the labor market return of Black student college attendees on the share of a college/university’s student population that is Black, there is a long-run earnings premium associated with HBCU attendance. In addition, for HBCUs in general, we find that there is a population of students who would realize a positive labor market premium—as high as approximately 42%—and earn more than a high school graduate if they were to attend an HBCU. With respect to intergenerational income mobility, we find that HBCU attendance enables their actual and potential attendees to move to a higher quantile of income relative to their households in the long run.

Urban scale and wage premium: evidence from China

Using the data of the China General Social Survey (CGSS) in 2010, the sixth national census in 2010 and the fifth national census in 2000, this paper examines the urban scale’s impact on workers’ wages by employing instrumental variables method. The study shows that China's large cities with 1–5 million population and megalopolis over 5 million population have significant urban scale wage premium. The living cost difference and agglomeration economy are the main causes of the megalopolis and large cities’ wage premium respectively. The high and low skilled workers both benefit from the expansion of urban scale. Policy implications of research findings are that moderate scale cities should be the main direction of Chinese urbanization; big cities should not only absorb high skilled labor, but also be inclusive for low skilled labor; migrant workers' urbanization is conducive to the prosperity of the city.

Does the urban wage premium differ by pre-employment status?

ABSTRACTThis paper investigates whether the density of local labour markets in Germany impacts on the wage of new employment relationships and whether corresponding urbanization economies differ significantly across distinct types of transitions to employment. The results suggest rather small static urbanization benefits. Doubling employment density increases the wage of new employment relationships by 1.0–2.6%. Moreover, benefits seem to accrue only to persons experiencing job-to-job transitions and the short-term unemployed, but not to the long-term unemployed. It is supposed these differences point to matching advantages in large urban labour markets from which only some job seekers benefit.

Work of the Past, Work of the Future

US cities today are vastly more educated and skill-intensive than they were five decades ago. Yet, urban non-college workers perform substantially less skilled jobs than decades earlier. This deskilling reflects the joint effects of automation and, secondarily, rising international trade, which have eliminated the bulk of non-college production, administrative support, and clerical jobs, yielding a disproportionate polarization of urban labor markets. The unwinding of the urban non-college occupational skill gradient has, I argue, abetted a secular fall in real non-college wages by: (1) shunting non-college workers out of specialized middle-skill occupations into low-wage occupations that require only generic skills; (2) diminishing the set of non-college workers that hold middle-skill jobs in high-wage cities; and (3) attenuating, to a startling degree, the steep urban wage premium for non-college workers that prevailed in earlier decades. Changes in the nature of work--many of which are technological in origin--have been more disruptive and less beneficial for non-college than college workers.

Local labor market size and qualification mismatch

AbstractThis paper investigates the effect of the size of the local labor market on skill mismatch. Using survey data for Germany, I find that workers in large cities are both less likely to be overqualified for their job and to work in a different field than the one for which they trained. Different empirical strategies are employed to account for the potential sorting of talented workers into more urbanized areas. Results on individuals who have never moved away from the place in which they grew up and fixed effects estimates obtaining identification through regional migrants suggest that sorting does not fully explain the existing differences in qualification mismatch across areas. This provides evidence of the existence of agglomeration economies through better matches. However, lower qualification mismatch in larger cities is found to explain at best a small part of the urban wage premium.

Frictional Labour Mobility

Abstract We build a dynamic model of migration where, in addition to standard relocation costs, workers face spatial frictions that decrease their ability to compete for distant job opportunities. We estimate the model on a matched employer–employee panel dataset describing labour market transitions within and between the 100 largest French cities. Our identification strategy is based on the premise that frictions affect the frequency of job transitions, while mobility costs impact the distribution of accepted wages. We find that: (1) controlling for spatial frictions reduces mobility cost estimates by one order of magnitude; (2) the urban wage premium is driven by better opportunities for local job-to-job transitions in larger cities; (3) migration reduces lifetime inequalities by providing insurance against unsatisfactory initial location draws; (4) labour mobility policies based on relocation subsidies are inefficient, unlike switching from nationwide to local minimum wages.

Migration and occupational careers: The static and dynamic urban wage premium by education and city size

AbstractUsing matched employer‐employee full population data on regional migrants in Sweden, this paper addresses the question whether the urban wage premium, and ‘thick’ labour market matching effects, are to be found across all educational groups, and whether the population threshold for these types of effects varies by educational category. Estimating initial wages, average wage level and wage growth 2001‐2009, we find similar wage premiums for all workers in the three largest metropolitan areas, but that there are distinct population thresholds for these type of effects, regardless of educational background. However, job search behaviour as explaining dynamic effects over time seems to pertain mostly to those with higher education.

Labor Density and Wages in Spain: Evidence from Geographically Disaggregated Data

AbstractIn this paper, Ciccone's () approach is applied to the Spanish case in 2011 but by estimating it using local labor markets (LLMs) instead of NUTS‐2 or NUTS‐3 regions. It is especially relevant in the case of Spain because the NUTS‐3 (provinces) are large regions in comparison with other cases in Europe. From a sample of income taxpayers published by the Spanish Fiscal Studies Institute, we derive figures on average wages by worker on the scale of LLMs. We argue that working at this level of spatial disaggregation is more in line with the idea of externalities from agglomerations, which are generated on a local scale. We can also observe intra‐regional heterogeneity and how the urban wage premium changes along the entire distribution of cities, including small‐medium size urban areas or rural areas. The empirical analysis is based on several estimation strategies, namely, ordinary least squares, two‐stages least squares, quantile regressions (QR), and instrumental variable quantile regressions (IVQR) estimators; they all find a significantly positive effect of agglomeration in the conditional mean of wages. This result can be estimated along the conditional distribution of wages. According to the QR and IVQR estimates, important variations are found along the distribution.

Local Labor Market Size and Qualification Mismatch

This paper investigates the effect of the size of the local labor market on skill mismatch. Using survey data for Germany, I find that workers in large cities are both less likely to be overqualified for their job and to work in a different field than the one they are trained for. Different empirical strategies are employed to account for the potential sorting of talented workers into more urbanized areas. Results on individuals never moving from the place of childhood and fixed-effects estimates obtaining identification through regional migrants suggest that sorting does not fully explain the existing differences in qualification mismatch across areas. This provides evidence of the existence of agglomeration economies through better matches. However, lower qualification mismatch in larger cities is found to explain only a small part of the urban wage premium.

Education, experience, and urban wage premium

Cities have higher wages and more college-educated workers than less populated areas. We investigate the heterogeneity of the agglomeration effect and sorting with respect to education. The magnitude of static and dynamic agglomeration effects on wages in Norway is estimated for different educational categories. Using rich administrative data for the period 2003–2010 with experience data back to 1993, we find that college-educated workers have higher return to labor market experience accumulated in cities. The city wage premium of less educated workers is increasing in job tenure, while the college educated gain more from shifting jobs between firms. We address sorting by comparing distributions of worker fixed effects by level of education. The distribution of unobserved abilities is similar in cities and the rest of the country for workers with only primary and secondary education, while the distribution for workers with college education is shifted to the right in cities. Sorting with respect to unobserved abilities matters for college-educated workers, even when taking dynamic learning effects into account. Distinguishing between young and old workers, we find that differences in unobserved abilities are more important early in a worker's career.

SKILLS, THE GENDER WAGE GAP, AND CITIES

ABSTRACTThis paper links gender wage gaps with the urban wage premium. First, the study documents gender wage gaps are narrower in larger U.S. metropolitan areas in 2000 and 2010. Skill agglomerations are then considered to explain this. Specifically, if men and women employ heterogeneous skills, and these skills have differential productivities across city sizes, agglomerative forces may differentially reward men and women. Occupational data show that women are concentrated in jobs relatively more intensive in interactive and cognitive skills, while men are comparatively in physical skill‐intensive jobs. Decomposing the gender wage gap shows that explanatory factors (education, skills, and location) predict women would outearn men. Instead, agglomerative skill returns account for majority of the gap. These estimates suggest that even as women employ skills rewarded in agglomeration economies, they benefit less from agglomerations than men, resulting in the observed gap.

Heterogeneous returns to knowledge exchange: Evidence from the urban wage premium

We posit that some kinds of knowledge are harder to exchange remotely and thus certain types of workers trading in certain types of knowledge benefit more from close physical proximity to others. We first present a theoretical framework in which individuals randomly search for partners to exchange ideas, but that the returns to finding a partner are heterogeneous. In particular, some knowledge is more dependent on interpersonal exchange and most productive when shared with similar individuals. In this manner, we propose that agglomerative environments favor individuals with knowledge that is typically associated with “soft skills” where creativity and informal networking are important. We test this prediction using the most recent sample of the American Community Survey (ACS) in which college graduates are asked about their undergraduate major. Controlling for demographic and regional productivity effects, we find that the urban wage premium varies considerably across majors. In line with the predictions of our model, people with non-STEM majors appear to benefit more from locating within a city. In the spirit of our results for majors, we also find that terminal degrees associated with the mastery of any existing cannon of knowledge such as a J.D. or M.D. experience a smaller urban wage premium.

The Urban Wage Premium in Imperfect Labour Markets

Using administrative data for West Germany, this paper investigates whether part of the urban wage premium stems from fierce competition in thick labour markets. We first establish that employers possess less wage-setting power in denser markets. Local differences in wage-setting power predict 1.1-1.6% higher wages from a 100 log points increase in population density. We further document that the observed urban wage premium from such an increase drops by 1.1-1.4pp once conditioning on local search frictions. Our results therefore suggest that a substantial part of the urban wage premium roots in differential imperfections across local labour markets.

WHAT DRIVES THE URBAN WAGE PREMIUM? EVIDENCE ALONG THE WAGE DISTRIBUTION

ABSTRACTThis paper aims at disentangling the role played by different explanations on the urban wage premium along the wage distribution. We analyze the wage dynamics of migrants from lower to higher density areas in Italy, using quantile regressions and individual data. The results show that unskilled workers benefit more from a wage premium accruing over time, while skilled workers enjoy a wage premium when they migrate as well as a wage increase over time. Further, we find that for unskilled workers the wage growth over time is mainly due to human capital accumulation in line with the “learning” hypothesis, while for skilled workers the wage growth is mainly explained by the “coordination” hypothesis, i.e., cities enhance the probability of better matches between workers and firms.

LOCATIONAL SIGNALING AND AGGLOMERATION

ABSTRACTAgglomeration can be caused by asymmetric information and a locational signaling effect: The location choice of workers signals their productivity to potential employers. The cost of a signal is the cost of housing at that location. When workers' marginal willingness to pay for housing is negatively correlated with their productivity, only the core‐periphery (partially stratified) equilibria are stable. When workers' marginal willingness to pay for housing and their productivity are positively correlated, there is no core‐periphery equilibrium. The urban wage premium is explained when there is a core‐periphery equilibrium. Furthermore, location can at best be an approximate rather than a precise sieve for high‐skill workers.