Kopafbeelding publicaties CPB

Why do wages grow faster in urban areas? Sorting of high potentials matters

CPB Discussion Paper 377, 28 February 2018

The existence of an urban wage growth premium is a well-established empirical fact. This article challenges the conventional view that faster wage growth for urban workers is caused by human capital spillovers.

Instead, we find that the positive association between city size and individual wage growth is to a large extent driven by sorting of workers and firms, with inherently higher wage growth, into bigger cities. Having controlled for spatial sorting, we conclude that only young workers experience significant urban wage growth benefits. Wage level benefits of urban areas are important to all types of workers, especially the highly educated.

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