Understanding the City Size Wage Gap

It is widely documented that wages are higher in larger cities. This relationship is robust to controls for age, schooling and labor market experience. This paper investigates the causes of the city size wage gap. In particular, we propose a unified framework for empirically investigating the extent to which selection on underlying productivity or ability, firm-worker matching and human capital spillovers can account for observed differences in wages between large and small cities. Our analysis utilizes a model of job search that incorporates endogenous migration between large and small cities. This model is rich enough to allow for recovery of the underlying ability distributions of workers by city size, arrival rates of job offers by ability and location, and returns to experience by ability and location, when structurally estimated using longitudinal data. These estimates facilitate a more complete empirical decomposition of the city size wage gap than is possible using results in existing research and produce new empirical evidence on the relative importance of various mechanisms by which larger cities are more productive.