Cities, Workers, and Wages: A Structural Analysis of the Urban Wage Premium

Abstract

Workers earn higher wages in cities vs. rural areas. This gap could arise because cities make workers more productive, or it could be the result of a non-random selection of workers into cities based on their ability and their endogenous history of career choices. To untangle these issues, this paper estimates a dynamic programming model, which embeds the choice of residing in a city or rural area within a model of career choices over time. After controlling for all the sources of selection and endogeneity, the estimates indicate that a given worker does earn more in the city for white-collar work, but not for blue-collar work. In addition, city work experience is found to be worth more than rural work experience in the rural area for white-collar work, but not for blue-collar work. These results support the interpretation that cities make white-collar workers more productive and suggest that workers may consider moving to the city not only in terms of locational choice, but also as a form of human capital investment. Copyright 2007 The Review of Economic Studies Limited.

Education, experience, and urban wage premium

“…The regression in column 3 includes worker fixed effects (as described by equation (2) Gould (2007) finds somewhat less reduction of the wage premium for white-collar workers, but larger for blue-collar. Glaeser and Mare (2001) produced worker fixed effect estimates that were about 1/3 of the initial wage gap.…”

“…Using the National Longitudinal Survey of Youth, Gould (2007) finds that wages of white collar workers increase faster in urban areas, whereas the wage growth of blue collar workers do not vary with urban scale. Using administrative panel data for Spain, De la Roca and Puga (2014) find that returns to work experience in big cities are highest for the most skilled workers, where skill is measured by worker fixed effects.…”

“…Studies based on US data (NLSY, PSID or PUM) tend to find that the urban wage premium is increasing in education/skills (Glaeser and Mare, 2001;Wheeler, 2001;Gould, 2007;Rosenthal and Strange, 2008;Bacalod et al, 2009). Exceptions are Adamson et al (2004) who find a nonlinear relation between the urban wage premium and education level, and Lee (2010) who finds that the urban wage premium is negative for high-skilled health workers and positive for less skilled health workers.…”

“…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).…”

Rural-to-urban migration, human capital, and agglomeration

“…The common wisdom in the received literature is that in developing countries, while unskilled rural-to-urban migration may harm the urban economy, skilled rural-to-urban migration will have a positive effect on the urban economy (for example, see McCormick and Wahba). The common wisdom is deficient because it is based on a partial-equilibrium analysis, concentrating on the beneficial impact of skilled rural-to-urban migration for the cities, while ignoring both the harmful impact of this migration for the rural 11 For the United States, an analysis based on data taken from the National Longitudinal Survey of the Labor Market Experience 1979 until 1998 (Gould, 2007) suggests that for "white-collar" workers, human capital gains acquired from working in the city are transferable to the rural areas. There is no evidence that moving to the rural areas wipes out the usefulness of human capital even if acquired in the city.…”