Urban Non-urban Agglomeration Divide: Is There a Gap in Productivity and Wages?

Abstract

This paper investigates the productivity–wage relation using a novel and integrated employer-employee database covering the entire population of non-financial firms’ plants in one of the most developed regions in Europe, i.e., the Italian Lombardy region. We suggest that although a growing literature shows that locating in urban areas yields substantial productivity gains due to agglomeration economies, the interaction between productivity and wages is ultimately the key to ascertaining the true advantage of the high densely populated areas. By adopting an empirical specification that allows us to explore interaction effects between localization and the sector of activity at the establishment level, we find that agglomeration economies play a significant but conditional role in affecting productivity and wage differentials while also controlling for firm-specific factors (in particular, job-related characteristics) and selection effects. The estimated impacts are heterogeneous across sectors, depending on their technological features. The effect of locating in High-density urban areas on the productive-wage gap is significantly positive only in highly knowledge-intensive services sectors; for firms supplying less technologically sophisticated services and for manufacturing plants, the impact is either not significant or negative. Locating in Rural areas generally exerts a downward (or not significant) impact on the productivity-wage gap.