Size and The City: Productivity, Match Quality and Wage Inequality

Yip, Chi Man (2011): Size and The City: Productivity, Match Quality and Wage Inequality.

Abstract

This paper elucidates the impact of city growth on wage and wage inequality using a search-theoretical approach. Firms differ in capital intensity and land intensity of the jobs created. When a worker meets a job via a matching technology, a match-specific productivity level is realized and they sign a job contract when they agree with the bargaining wage. A rise in population density leads to rental increment. As a consequence, a higher expected flow profit is required for the creation of a good job. Rent-sharing ensures an increase of the average wage in the good-job sector. This, in turn, increases the reservation wage of workers in the equilibrium. Although the rental increment does not affect the setup costs in the bad-job sector, higher realized productivity level is required to cover higher reservation wage. Since only job contacts with realized productivity levels exceeding reservation productivity threshold are observed, such increase in the threshold raises also the average wage in the bad-job sector. Hence, the average productivity, the match quality and wage go up in each sector unambiguously, giving rise to urban wage premium. In addition, this paper predicts that urbanization widens residual wage inequality of a city. Existing empirical evidence is presented to support the implications of this model.

• Item Type: MPRA Paper
• Language: English
• Keywords: Urban Wage Premium; Match Quality; Job Match
• Subjects: J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O15 - Human Resources ; Human Development ; Income Distribution ; Migration; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J64 - Unemployment: Models, Duration, Incidence, and Job Search

References

[1] Abowd, J.M., Kramarz, F. Margolis, D.N. (1999) “Higher wage workers and high wage firms." Econometrica, 67: 251-333.

[2] Acemoglu, D., (2001) “Good jobs versus bad jobs." Journal of Labor Economics, 19: 1-21.

[3] Andersson, F., Burgess, S., Lane, J.I., (2007) “Cities, matching and the productivity gains of agglomeration." Journal of Urban Economics, 61: 112-128.

[4] Bacolod, M., Blum, B.S., Strange, W.C., (2009) “Skills in the city." Journal of Urban Economics, 65: 136-153.

[5] Barron, J.M., (1975) “Search in the labor market and the duration of unemployment: Some empirical evidence." American Economic Review, 65: 934-942.

[6] Baum-Snow, N., Pavan, R., (2010) “Inequality and city size." Working Paper.

[7] Borjas, G.J., Bronars, S.G., Trejo, S.J., (1992) “Self-selection and internal migration in the united states." Journal of Urban Economics, 32: 159-185.

[8] Ciccone, A., Hall, R., (1996) “Productivity and the Density of Economic Activity." American Economic Review, 86: 54-70.

[9] Combes, P.P., Duranton, G., Gobillon, L., (2008) “Spatial wage disparities: Sorting matters!" Journal of Urban Economics, 63: 723-742.

[10] Detang-Dessendre, C., Gaigne, C., (2009) “Unemployment duration, city size, and the tightness of the labor market." Regional Science and Urban Economics, 67: 392-403.

[11] Gautier, P.A., Teulings, C.N., (2009) “Search and the city." Regional Science and Urban Economics, 39: 251-265.

[12] Gautier, P.A., Zenou, Y., (2010) “Car ownership and the labor market of ethnic minorities." Journal of Urban Economics, 67: 392-403.

[13] Glaeser, E.L., (1999) “Learning in cities." Journal of Urban Economics, 46: 254-277.

[14] Glaeser, E.L., Mare, D.C., (2001) “Cities and skills." Journal of Labor Economics, 19: 316-342.

[15] Gould, E.D., (2007) “Cities, workers, and wages: a structural analysis of the urban wage premium." The Review of Economic Studies, 74: 477-506.

[16] Helpman, E., Itskhoki, O., Redding, S., (2010) “Inequality and unemployment in a global economy." Econometrica, 4: 1239-1283.

[17] Kim, S., (1990) “Labor heterogeneity, wage bargaining, and agglomeration economies." Journal of Urban Economics, 28: 160-177.

[18] Kim, S., (1991) “Heterogeneity of labor markets and city size in an open spatial economy." Regional Science and Urban Economics, 21: 109-126.

[19] Korpi, M., (2008) “Does size of local labour markets affect wage inequality? a rank-size rule of income distribution" Journal of Economic Geography, 8: 211-237.

[20] Pissarides, C.A., (1986) “Unemployment and vacancies in Britain." Economic Policy, 3: 499-559.

[21] Petrongolo, B., Pissarides, C.A., (2006) “Scale effects in markets with search." Economic Journal, 116: 21-44.

[22] Rauch, J.E., (1993) “Productivity gains from geographic concentration of human capital: Evidence from the cities." Journal of Urban Economics, 34: 380-400.

[23] Saiz, A., (2007) “Immigration and housing rents in American cities." Journal of Urban Economics, 61: 345-371.

[24] Sato, Y., (2001) “Labor heterogeneity in an urban labor market." Journal of Urban Economics, 50: 313-337.

[25] Sato, Y., (2004) “City structure, search, and workers' job acceptance behavior." Journal of Urban Economics, 55: 350-370.

[26] Venables, A.J., (2011) “Productivity in cities: Self-selection and sorting." Journal of Economic Geogrphay, 11: 241-251.

[27] Wasmer, E., Zenou, Y., (2002) “Does city structure affect job search and welfare?" Journal of Urban Economics, 51: 515-541.

[28] Winters, J.V., (2009) “Wages and prices: Are workers fully compensated for cost of living differences?" Regional Science and Urban Economics, 39: 632-643.

[29] Yankow, Y.Y., (2006) “Why do cities pay more? An empirical examination of some competing theories of the urban wage premium." Journal of Urban Economics, 60: 139-161.

[30] Zenou, Y., (2009) “Search in cities." European Economic Review, 53: 607-624.