Paolo Martellini

Paolo Martellini
Job Market Paper

The City-Size Wage Premium: Origins and Aggregate Implications

Why do workers earn higher wages in larger cities, and why does the city-size wage premium increase over the life cycle? What are the aggregate implications of spatial wage differentials? To answer these questions, I introduce the first dynamic equilibrium model of knowledge diffusion and labor market frictions in cities. I estimate the model by matching aggregate differences in labor market outcomes between small and large US cities. To validate the model, I verify its performance in replicating micro evidence on selection into–and the return to–migration. I find that knowledge diffusion becomes increasingly important over the life cycle, as it accounts for up to forty percent of the wage premium at twenty years of labor market experience. Higher firm-worker match quality has a level effect of about a third of the average wage premium. The residual wage premium is explained by life-cycle sorting on observable education and unobservable human capital. I then show that the optimal spatial allocation of workers displays less dispersion in city size and stronger educational sorting than the laissez-faire equilibrium, due to heterogeneity across workers in the ability to generate knowledge spillovers. Last, I use my framework to study the consequences of relaxing housing regulation in large cities. I show how the resulting relocation of workers across cities affects local productivity. A hypothetical scenario in which productivity is policy-invariant overstates the magnitude of the equilibrium income gains by more than a factor of 2.5.

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Other Research

Declining Search Frictions, Unemployment and Growth (with Guido Menzio​​​​​​​), R&R at Journal of Political Economy

The Diamond-Mortensen-Pissarides theory argues that unemployment and vacancies emerge because of search frictions in the labor market. Yet, over the last century, US unemployment and vacancy rates show no trend, even though search efficiency in the labor market must have improved thanks to the diffusion of telephones, computers and the Internet. We resolve this puzzle using a search model where firm-worker matches are inspection goods. We show that iff the distribution of idiosyncratic productivity for new matches is Pareto, then unemployment, vacancy, job-finding and job-loss rates remain constant while the efficiency of search grows over time. Improvements in search technology show up in productivity growth. A corollary of our theory is that population growth does not affect unemployment and vacancy rates even under non-constant returns to scale in the search process. We develop and implement a strategy to measure the growth rate of the search technology, the returns to scale of the search process, and their contribution to productivity growth.

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Revisiting the Hypothesis of High Discounts and High Unemployment (with Guido Menzio and Ludo Visschers), R&R at The Economic Journal

We revisit the hypothesis that labor market fluctuations are driven by shocks to the discount rate. Using a model in which the UE and the EU rates are endogenous, we show that an increase in the discount rate leads to a decline in both the UE and the EU rates. In the data, though, the UE and EU rates move against each other at business cycle frequency. Using a lifecycle model with human capital accumulation on the job, we show that an increase in the discount rate does indeed lead to a decline in the aggregate UE rate and to an increase in the aggregate EU rate. However, the decline in the UE rate is larger for younger workers than for older workers and the EU rate increases only for younger workers. In the data, fluctuations in the UE and EU rates at the business cycle frequency are nearly identical across age groups.

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Sorting, Commuting Cost, and School Choice (with Francesco Agostinelli and Margaux Luflade)

Teaching Experience


Macroeconomic Theory, Teaching Assistant for Prof. Guido Menzio (Spring 2016-2018)


Markets with Frictions, New York University, Teaching Assistant for Prof. Guido Menzio (Spring 2019)

Public Finance, University of Pennsylvania, Teaching Assistant for Dr. Margaux Luflade (Fall 2018)

Game Theory, University of Pennsylvania, Teaching Assistant for Dr. Annie Liang (Fall 2018)

Public Finance, University of Pennsylvania, Teaching Assistant for Prof. Hanming Fang (Fall 2017)

Urban Fiscal Policy, University of Pennsylvania, Teaching Assistant for Prof. Holger Sieg (Fall 2017)

Introduction to Micro and Macro, University of Pennsylvania, Teaching Assistant for Dr. Gizem Saka (Fall 2015)

Other Information


NYU Search Theory Workshop (2019), NBER EF&G (2019), EIEF (2019), NBER Summer Institute (2018), Minnesota Macro (2018), Philadelphia Fed (2018), EIEF (2018)

Professional Activities

Referee for American Economic Review: Insights, The Economic Journal, International Economic Review


Macroeconomics, Labor Economics, Urban Economics


+1 (267) 210-0600


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Guido Menzio


Professor Guido Menzio (Advisor)

Department of Economics

New York University

+1 (773) 865-6337


Professor Dirk Krueger

Department of Economics

University of Pennsylvania

+1 (215) 573-1424


Professor José-Víctor Ríos-Rull

Department of Economics

University of Pennsylvania

+1 (215) 898-7701


Professor Jesús Fernández-Villaverde

Department of Economics

University of Pennsylvania

+1 (215) 573-1504

Job Market Candidate Status
I am on the job market and I will be available for interviews at the 2020 ASSA Annual Meeting in San Diego and the European Job Market 2019 in Rotterdam.