In 2000, hourly wages of prime-age men were 31 percent higher in metropolitan areas of over 2.5 million people than those of less than 100 thousand people. Moreover, the relationship between wages and population was monotonically increasing by about 1 percentage point for each additional 100 thousand in population over the full range of metropolitan area size. This monotonic relationship is robust to controls for age, schooling and labor market experience. The existence of this city size wage gap implies that workers are more productive in larger cities. Otherwise, firms in large cities would migrate to locations with lower costs. This research program would improve our understanding of the causes of the city size wage and productivity gaps. The investigators develop a labor market search model that incorporates endogenous migration between large and small cities. This model is sufficiently rich 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. This line of research also produces new empirical evidence on the relative importance of various mechanisms by which larger cities are more productive.
While there exists a variety of existing research on the city size wage and productivity gaps finding that differences in wage growth rates and ability sorting as functions of city size are important, there still exists a lack of understanding of the role played by labor market search externalities in particular to generate these productivity gaps. Moreover, existing research largely focuses on estimating causal effects on productivity of one type of externality at a time. Little work has examined the potentially important interaction between various explanations. The main reason is that most of the regression-based procedures commonly used in existing research cannot account for the possibility that those who live in larger cities may have unobserved attributes that make them more productive, and this unobserved ability may interact with the other factors such as the labor market search technology. With free migration between cities and jobs, exogenous variation is extremely difficult to find. The proposed research thus complements the existing literature by making use of a model to help identify components of the city size productivity gap for which there is no exogenous variation. In addition, estimation of the model can be used to perform decompositions that are not possible with results in the existing literature.
Broader Impacts: A better understanding of why bigger cities are more productive will greatly inform our understanding the important factors that drive the success or decline of communities. This research program also trains graduate students in the careful construction of data sets and the use of modern modeling, econometric and computational techniques.
