In this paper, we decompose city size wage premia into various components. We base these decompositions on an estimated on-the-job search model that incorporates latent ability, search frictions, firm-worker match quality, human capital accumulation and endogenous migration between large, medium and small cities. Counterfactual simulations of the model indicate that variation in returns to experience and differences in wage intercepts across location type are the most important mechanisms contributing to observed city size wage premia. Variation in returns to experience is more important for generating wage premia between large and small locations while differences in wage intercepts are more important for generating wage premia betwen medium and small locations. Sorting on unobserved ability within education group and differences in labor market search frictions and distributions of firm-worker match quality contribute little to observed city size wage premia. These conclusions hold for separate samples of high school and college graduates.

Between 1979 and 2007 a strong positive monotonic relationship between wage inequality and city size has developed. This paper investigates the links between this emergent city size inequality premium and the contemporaneous nationwide increase in wage inequality. After controlling for the skill composition of the workforce across cities of different sizes, we show that at least 23 percent of the overall increase in the variance of log hourly wages in the United States from 1979 to 2007 is explained by the more rapid growth in the variance of log wages in larger locations relative to smaller locations. This influence occurred throughout the wage distribution and was most prevalent during the 1990s. More rapid growth in within skill group inequality in larger cities has been by far the most important force driving these city size specific patterns in the data. Differences in the industrial composition of cities of different sizes explain up to one-third of this city size effect. These results suggest an important role for agglomeration economies in generating changes in the wage structure during the study period.

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In this article, I present structural estimates of a search model that flexibly incorporates general human capital accumulation along with career and firm choice, where a career is empirically identified as a combination of industry and occupation. I use these estimates to empirically distinguish between the relative importance of various factors for generating wage growth over the life cycle. Evidence presented in the article highlights the importance of considering the two-stage search process that originates from the model. In particular, I demonstrate that previous instrumental variables methods dramatically underestimate the importance of firm-specific matches for wage growth.

This paper examines mechanisms driving the more rapid increases in wage inequality in larger cities between 1980 and 2007. Production function estimates indicate strong evidence of capital–skill complementarity and increases in the skill bias of agglomeration economies in the context of rapid skill-biased technical change. Immigration shocks are the source of identifying variation across cities in changes to the relative supply of skilled versus unskilled labor. Estimates indicate that changes in the factor biases of agglomeration economies rationalize at least 80 percent of the more rapid increases in wage inequality in larger cities. (JEL J24, J31, O33, R23)