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Unraveling the urban wage premium

Andrew Perumal, University of Nebraska - Lincoln


Nominal urban wages are typically 30% higher than wages in non-metropolitan areas. This dissertation examines the sources of the urban wage premium (UWP) from three perspectives: (1) the urban worker earning the premium; (2) the underlying factors allowing firms to pay the premium; and (3) the location choices of these workers and firms.^ The UWP is typically modeled as returns to the worker following from productivity spillovers arising through agglomeration economies. However, the cost-of-living has received little attention in these studies; I examine the nominal and real UWP to determine whether these high wages are indeed a windfall. I find substantial evidence that workers are now willing to experience negative real wages so as to benefit from the consumer amenities and ease of access to those amenities in large, dense cities. These results shed light on the growing importance of urban areas as consumption hubs.^ Having explored the UWP from the workers perspective, I examine the sources of the firm-level productivity that allow them to pay such high wages. In recent decades, the ease of communicating ideas and the shear density of large urban areas have spurred their continued growth; though there is little consensus on the nature of the optimal conditions for stimulating such knowledge spillovers. I analyze the relative importance of industry specialization, diversity and competition across all industries and all metropolitan areas from 1970 to 2004; and find that cross-fertilization of ideas across industries is a key determinant of growth, with competition spurring the rapid adoption of any innovation.^ To complement this work, I examine the influence of production amenities on the location decision of households and firms. While there have been numerous contributions to the literature regarding the specific urban amenities that are appealing to households, there has been limited prior work exploring the specific production amenities that are attractive to firms. Within the analytical framework of hedonic wages and housing prices, I find that firms and households have very similar preferences for amenities such as climate, low crime rates, and government services; except that firms have a strong preference for a high level of industry diversity.^

Subject Area

Economics, General|Economics, Labor

Recommended Citation

Perumal, Andrew, "Unraveling the urban wage premium" (2011). ETD collection for University of Nebraska - Lincoln. AAI3466258.