Agglomeration Spillovers and Wage and Housing Cost Gradients across the Urban Hierarchy

The tyranny of distance in terms of its effect on median earnings and housing costs is examined for rural and urban U.S. counties. First, we develop a series of distance metrics for an area’s remoteness from multiple tiers of the urban hierarchy. Second, we consider geographical access of buyers and sellers through market-potential measures typical of those used in empirical studies of the New Economic Geography. The results reveal penalties of about 5 to 9% for median earnings and 12 to 17% for housing costs due to remoteness from the combined tiers of the urban hierarchy. Differences in market potential also influence factor prices, but these effects are generally smaller than those produced by urban hierarchy distances. Thus, it appears that empirical tests of New Economic Geography models need to consider sources of agglomeration spillovers beyond aggregate market potential. Visually depicting these results using maps illustrates that urban hierarchy distance penalties dominate in the western U.S., but the influence of market potential and urban hierarchy are about equal in the East.