Amenities and wage premiums: the role of services

Abstract

This paper studies amenities and wage premiums in a service economy where individuals with different skills choose cities with different amenities and choose occupations to produce different services, namely the high-quality service or the low-quality service. Workers with higher skills have stronger preferences for amenity and choose the high-amenity city. Within each city, workers with higher skills choose to produce the high-quality service, and workers with lower skills choose to produce the other. Workers with higher skills are willing to sacrifice more wages to live in the high-amenity city. As a result, the price of the high-quality service, relative to the price of the low-quality service, is lower in the high-amenity city, because the wage equals the price times skill or productivity. The wage of a worker with a given skill in the high-quality service sector, relative to the wage of a worker in the low-quality service sector, or the wage premium, is thus lower in the high-amenity city. A quantitative analysis shows that the wage premium is about 3% lower when amenity is 10% higher. However, the average wage of high-quality service workers over that of low-quality service workers may be lower or higher in the high-amenity city due to skill concentration in the high-amenity city. JEL Classification J2 • J3 • R1We are grateful to Jan Brueckner and three anonymous referees for their helpful comments.