Understanding the City Size Wage Gap

Joint with: Nathaniel Baum-Snow, Brown University

In 2000, wages of full time full year workers were over 30 percent higher in metropolitan areas of over 1.5 million people than rural areas. The monotonic relationship

between wages and city size is robust to controls for age, schooling and labor market experience. In this paper, we decompose the city size wage gap into various components.

We propose a labor market search model that incorporates endogenous migration between large, medium and small cities. This model is sufficiently rich to allow for

recovery of the underlying ability distributions of workers by city size, arrival rates of job offers by ability and location, and experience profiles by ability and location, when structurally estimated using longitudinal data. Parameter estimates from our structural

model indicate that for both college and high school graduates differences in wage level effects and returns to experience across location types are important mechanisms

contributing to the wage premium for medium sized cities. Ability sorting across locations at the time of labor force entry and search frictions are important mechanisms

generating the wage premium of large cities.

For more information, contact Petra Todd.