Cities and Human Capital
November 14, 2001
Cities are focal points of commerce and economic activity. Their residents are more productive and are paid higher wages than people living in rural areas. In fact, wages are 33 percent higher in big metropolitan cities, compared to smaller cities and towns.
Why is this so? One theory is that people who choose to live in cities have certain characteristics that make them more productive, thus explaining the wage differential. However, even after taking skills and personal attributes into account, researchers have found that city wages still are 20 percent greater than rural wages. Thus self-selection cannot be the whole answer.
Another theory is that urban residents benefit from lower costs due to higher population density. For instance, transportation, goods, information exchange and infrastructure are all cheaper in cities. These spillovers of living in close proximity and sharing information could create a wage gap. While spillover effects do occur, however, economists argue that if this theory is correct higher wages should accrue immediately upon taking up residency in a city. But that is not the case:
- Wages of recent migrants to cities grow steadily at 10 percent to 15 percent per year for the first few years and rise 8 percent to 12 percent faster than non-city workers.
- Moreover, the urban wage premium is higher for long term residents compared to new migrants.
A better explanation of the wage differential, say some researchers, is that cities have a higher accumulation of human capital compared to other areas. Cities are better at fostering learning and specialization (which increase wages) and they also have more coordinated labor markets (which let workers find the best paying jobs). And individuals accumulate more human capital (through education and experience) over time -- which explains why the wage premium increases with length of residency.
Source: "Cities, Skills and Wages," Economic Intuition, Spring 2001; based on Edward L. Glaeser and David C. Mare, "Cities and Skills," Journal of Labor Economics, April 2001.
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