Urban Wages: Does City Size Matter?

Abstract

The literature on the relationship between city size and urban wages argues that productivity and wages are higher in larger cities. Indeed, a doubling of city size is associated with a 4—8 per cent increase in wages. The human capital externalities literature finds evidence of higher wages in cities with an abundant supply of human capital where knowledge spillovers are plentiful. Interestingly, cities with a large supply of human capital are not themselves large. They have a population of fewer than 1.5 million inhabitants. In view of this evidence, this paper questions whether city size has lost its importance as a determinant of high wages. In other words, is city size necessary to explain wage variations, after controlling for knowledge spillovers? Using a large sample from the 5 per cent PUMS of the 2000 US Census, this paper presents econometric evidence for city size and learning spillover effects on productivity. According to the estimates presented, every additional 100 000 inhabitants in the local labour market raises individual hourly wages by 0.12 per cent. Moreover, a doubling of the human capital density in a metropolitan area results in approximately a 2 per cent increase in average individual hourly wages.