Persistent productivity gains to rural-urban migrants have been documented by a number of researchers. One interpretation of this result is that individuals learn higher value skills in cities than they would have learned in less dense areas. Another explanation for this result, however, is that thicker urban labor markets allow for better matches, which are realized slowly through a process of subsequent job searches. Surprisingly, there has been no empirical test of these two interpretations to this date. This paper uses NLSY79 geocode data to assess whether wage growth of urban workers is due primarily to time spent in the urban environment (and thus learning), or job changes. The evidence suggests that both these processes are probably at work.

As has been noted by many authors, wages are higher in urban areas, and higher still in larger urban areas. From the labor supply side, it is not difficult to see why this would be the case. To attract workers to large cities, employers must compensate them for the high cost of living, and possibly also for congestion externalities associated with these areas. Looking at the question from the labor demand side does not yield as obvious an explanation. Why should profitmaximizing firms be willing to pay workers more in large cities than in smaller cities or rural areas? Clearly, it must be the case that workers in large cities are more productive than workers in smaller cities?

Intuitively, we all know that there is something different about cities. How and why they are different is the subject of perennial debate. Recent economic research has begun to be able to formalize the intuitions laid out by Alfred Marshall in the 19th century and Jane Jacobs in the mid-twentieth century. This paper has attempted to shed light on the source of one of these aspects of cities: the fast wage growth urban workers experience.

It is found that several plausible explanations for this phenomenon are supported by the data. The diminishment of the urban level effect when observable and unobservable characteristics are controlled for suggests that there is sorting into large labor markets. The persistently significant coefficient on the un-interacted urban status variables suggest that agglomeration economies deriving from scale economies in the production of goods, services and/or public infrastructure may also be contributing to high urban wages. However, it is likely that at least some of these level effects are deriving from the matching and learning dynamics discussed in the text. The wage data used in the paper comes from surveys conducted some time after respondents would have moved to or from the city. If urban-rural migrants are able to find better matches in cities, even with their first job, then some of the urban level effect would come from a matching effect.

IZA
P.O. Box 7240
D-53072 Bonn
Germany
Douglas J. Krupka

/12/2007

Douglas J. Krupka

research

Urban Policy > Economy knowledge & employment > Urban economy

Competitiveness