Why do cities pay more? An empirical examination of some competing theories of the urban wage premium

OLS regression identifies a 19 percent wage advantage for workers in large urban areas. Fixed-effects estimation suggests that two-thirds of this premium can be explained by cities attracting workers of higher unmeasured skills and ability. The remaining wage premium is shown to consist of both level and growth elements. The wage level effect is consistent with a productivity advantage for firms located in cities. The wage growth effect is shown to relate in part to a cumulative advantage in the returns to job mobility for urban workers. This last finding highlights the importance of coordination in urban labor markets. (c) 2006 Elsevier Inc. All rights reserved.