The urban wage growth premium: evidence from British cities

The urban economics literature provides ample evidence of an urban wage premium: wages are higher in larger urban areas. This paper addresses three central issues of the urban wage premium about which the field has not yet reached a consensus. First, the extent to which sorting of high ability individuals into urban areas explains the urban wage premium. Second, which of the major agglomeration economies might generate this premium. Third, whether workers receive this wage premium immediately, or through faster wage growth over time. In order to consider these issues we use worker-level data from a large panel of British workers for the period 1998 to 2009. We first document the existence of an urban wage premium and more specifically a city size premium for Britain which persists when we control for both observed and unobserved time-invariant characteristics of workers. We also provide evidence of a city size premium on wage growth, but show that this is driven purely by the increase in wage that occurs in the first year that a worker moves to a larger location. When we exclude move years, we find no evidence of an urban wage growth premium. If as Glaeser and Maré (2001) argue, an urban wage growth premium is evidence of faster learning in cities then either this mechanism is not at work for Britain or faster learning is not reflected in wage growth. Wheeler (2006) suggests that the role of learning and matching in the urban wage growth premium might be particularly important for younger workers. Again, in the British context, we find little evidence to support this. We next examine whether living in an urban area affects the extent to which wage growth occurs on the job or as a result of changing jobs. Once we control for unobservable characteristics of workers we find no evidence that working in a larger urban area has any effect on either of these two components of wage growth. This result is also in contrast with the conclusions made in the US literature in favour of the role of learning and matching in cities. City living does have some impact on wage growth, however. Specifically, we show that workers who have at some point lived in a city experience faster wage growth than those who have never lived in a city.