Spatial wage disparities: Sorting matters!

Abstract

Spatial wage disparities can result from spatial differences in the skill composition of the workforce, in nonhuman endowments, and in local interactions. To distinguish between these explanations, we estimate a model of wage determination across local labour markets using a very large panel of French workers. We control for worker characteristics, worker fixed effects, industry fixed effects, and the characteristics of the local labour market. Our findings suggest that individual skills account for a large fraction of existing spatial wage disparities with strong evidence of spatial sorting by skills. Interaction effects are mostly driven by the local density of employment. Not controlling for worker heterogeneity leads to very biased estimates of interaction effects. Endowments only appear to play a small role.Keywords local labour markets, spatial wage disparities, panel data analysis, sorting Disciplines Economics | Real Estate Comments• At the time of publication, author Gilles Duranton was affiliated with the University of Toronto.Currently, he is a faculty member at the Real Estate Department at the University of Pennsylvania. Abstract Spatial wage disparities can result from spatial dierences in the skill composition of the workforce, in non-human endowments, and in local interactions. To distinguish between these explanations, we estimate a model of wage determination across local labour markets using a very large panel of French workers. We control for worker characteristics, worker xed eects, industry xed eects, and the characteristics of the local labour market. Our ndings suggest that individual skills account for a large fraction of existing spatial wage disparities with strong evidence of spatial sorting by skills. Interaction eects are mostly driven by the local density of employment. Not controlling for worker heterogeneity leads to very biased estimates of interaction eects. Endowments only appear to play a small role.Key words: local labour markets, spatial wage disparities, panel data analysis, sorting jel classication: r23, j31, j61 a We are grateful to Lionel Fontagné, Vernon Henderson, Francis Kramarz, Thierry Magnac, Gianmarco Ottaviano, Barbara Petrongolo, Diego Puga, Jean-Marc Robin, Sébastien Roux, Jon Temple, Dan Treer, two anonymous referees, and especially Henry Overman for fruitful discussions, advice and encouragements. We also acknowledge France Guérin, Francis Kramarz and Sébastien Roux's kind and ecient help with the data. Seminar and conference participants in Bogotá, Bristol, Brown, CREST, Kiel, Lille, LSE, Marseille, Paris, Philadelphia, Rome, Royal Holloway, Stockholm, Stoke-Rochford, Toronto, UCL, and Villars also provided us with very useful feed-back.

Marshallian labour market pooling: Evidence from Italy

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