Time-Varying Agglomeration Economies and Aggregate Wage Growth

We quantify the effects of city agglomeration economies on labour earnings in France over a forty-year period using individual wage panel data. We first delineate cities at every date to consider changes in their footprint over time. We then estimate a daily wage specification that includes time-varying city effects while controlling for observed and unobserved individual heterogeneity. We regress these city effects on agglomeration variables every year, and assess how changes in values and returns to agglomeration variables affect the evolution of daily wages. We find a negligible role for changes in values, but an important role for changes in returns. There is also significant heterogeneity across cities, even among large cities of similar sizes. We propose a theoretical model in which agglomeration economies affect both population and city area. A calibration exercise shows that changes in returns to agglomeration economies are not enough to generate variations in population and city area influencing significantly aggregate labour earnings. This result is consistent with the negligible role of changes in values found in our empirical investigation.