The Effect of Working from Home on the Agglomeration Economies of Cities: Evidence from Advertised Wages

Liu, Sitian and Su, Yichen (2022): The Effect of Working from Home on the Agglomeration Economies of Cities: Evidence from Advertised Wages.

Abstract

We analyze the effect of working from home on the agglomeration economies of large cities and the aggregate productivity implications of such an effect. Using advertised wages from job ads, we show that occupations with the highest work-from-home adoption during the COVID-19 pandemic saw a strong decrease in the urban wage premium. The decline in the urban wage premium is accompanied by an exodus of employment (based on firms' locations) from large cities to small cities. In contrast, occupations with low or moderate levels of work-from-home adoption saw much smaller overall reduction in the urban wage premium. The empirical evidence in our paper points to weakened agglomeration economies in large cities among professions with the highest prevalence of working from home. A decomposition exercise reveals that a sizable portion of the decline in the urban wage premium is driven by the decline in the urban wage premium of relationship-building skills, suggesting that the decreased agglomeration effect in large cities is at least partially a result of reduced occurrence of interactive activities.

• Item Type: MPRA Paper
• Language: English
• Keywords: Agglomeration; Productivity; Spillover; Urban Wage Premium; Working from Home; Remote; Virtual; WFH; Wages; Job Posting; COVID-19; Pandemic
• Subjects: J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J24 - Human Capital ; Skills ; Occupational Choice ; Labor Productivity; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R12 - Size and Spatial Distributions of Regional Economic Activity; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R2 - Household Analysis > R23 - Regional Migration ; Regional Labor Markets ; Population ; Neighborhood Characteristics

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