The Wage Premium in Italian Cities

In most countries urban workers enjoy higher wages than non urban ones, and this premium increases with the size of the city. In this paper we show that in Italy hourly wages of private-sector workers are 6% higher in urban areas than in non-urban local labor markets (less than 2% controlling for observable workers’ characteristics); this premium is higher for more educated workers and for women. More generally, as the local population grows, hourly wages tend to increase: doubling population increases wages by 2.1% (less than 1% net of workers’ characteristics). Even larger gaps are usually estimated in other developed countries. Using an employer-employee dataset and a standard AKM wage decomposition, we divide Italian wages into two components, one proxying for worker’s skills and the other one proxying for firm’s quality. We find that better workers and better firms both tend to sort themselves in urban areas. Nevertheless, the sorting of workers seems to be more relevant than the sorting of firms, resulting in a larger urban premium for the workers’ component. The sorting of firms is almost entirely explained by a few characteristics of the local labor market, such as higher educational attainment and labor market participation.