Understanding the City Size Wage Gap

Abstract

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.

Education, experience, and urban wage premium

“…Several studies have concluded that the urban -rural wage gap is partly or completely due to differences in wage growth between urban and rural areas (Glaeser and Mare, 2001;Wheeler, 2006;Yankow, 2006;Gould, 2007;Baum-Snow and Pavan, 2012;Wang, 2013;De la Roca and Puga, 2014). Wage growth seems to have a substantial between-job component (Wheeler, 2006;Yankow, 2006), and workers at least partly keep wage gains when moving to other regions, indicating that returns to work experience in urban areas are portable (D'Costa and Overman, 2014;De la Roca and Puga, 2014).…”

Job Search and Migration in a System of Cities

“…A similar assumption is found in Baum-Snow & Pavan (2012). In terms of the model, a sufficient condition for ruling out the possibility of migration into unemployment is that the difference in lifetime 26 See the discussion in the online appendix of Cahuc, Postel-Vinay & Robin (2006).…”

“…One way to overcome this issue is to consider a very stylized definition of space. This is the path taken by Baum-Snow & Pavan (2012), who consider a model which includes several appealing features such as individual ability and location-specific human capital accumulation, but have to resort to a ternary partition of space between small, midsized and large cities.…”

Agglomeration Theory with Heterogeneous Agents

“…This is counterfactual. Using individual data, Wheeler (2001) and Baum-Snow and Pavan (2012) estimate that the skill premium and the returns to experience of US workers increase with city size. 62 A theoretical framework that delivers a positive relationship between city size and the returns to productivity is provided in Davis and Dingel (2013) and Behrens and Robert-Nicoud (2014b).…”