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Understanding the City Size Wage Gap.

Nathaniel Baum-Snow1, Ronni Pavan

  • 1Brown University.

The Review of Economic Studies
|November 26, 2013
PubMed
Summary

City size wage premia are mainly driven by varying returns to experience and wage intercepts, not sorting or search frictions. These findings apply to both high school and college graduates.

Area of Science:

  • Economics
  • Urban Economics
  • Labor Economics

Background:

  • City size wage premia are a well-documented phenomenon in urban and labor economics.
  • Existing research has explored various factors contributing to these premia, but a comprehensive decomposition remains challenging.
  • Understanding the drivers of wage differentials across cities is crucial for policy-making and individual decision-making.

Purpose of the Study:

  • To decompose city size wage premia into distinct components using an on-the-job search model.
  • To identify the primary mechanisms responsible for wage differentials between large, medium, and small cities.
  • To analyze the role of latent ability, search frictions, match quality, human capital, and migration in explaining these premia.

Main Methods:

Keywords:
AgglomerationUrban Wage PremiumWage Growth

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  • Estimation of an on-the-job search model incorporating latent ability, search frictions, firm-worker match quality, human capital, and endogenous migration.
  • Decomposition of city size wage premia based on the estimated model parameters.
  • Counterfactual simulations to isolate the impact of different components on wage premia.

    • Main Results:

    • Variation in returns to experience and differences in wage intercepts across location types are the most significant contributors to city size wage premia.
    • Returns to experience are more critical for large versus small city premia, while wage intercepts are more important for medium versus small city premia.
    • Sorting on unobserved ability, labor market search frictions, and firm-worker match quality distributions play a minor role in observed wage premia.

    Conclusions:

    • The study highlights the importance of dynamic labor market adjustments (returns to experience) and baseline wage levels (wage intercepts) in explaining city size wage premia.
    • The findings suggest that policies aimed at reducing wage gaps should consider factors influencing experience returns and wage structures across different city sizes.
    • The conclusions are robust across samples of both high school and college graduates, indicating generalizability.