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The urban wage premium in imperfect labour markets

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  • Hirsch, Boris
  • Jahn, Elke J.
  • Manning, Alan
  • Oberfichtner, Michael

Abstract

Using administrative data for West Germany, this paper investigates whether part of the urban wage premium stems from fierce competition in thick labour markets. We first establish that employers possess less wage-setting power in denser markets. Local differences in wage-setting power predict 1.8–2.1% higher wages from a 100 log points increase in population density. We further document that the observed urban wage premium from such an increase drops by 1.5–1.9pp once conditioning on local search frictions. Our results therefore suggest that a substantial part of the urban wage premium roots in differential imperfections across local labour markets.

Suggested Citation

  • Hirsch, Boris & Jahn, Elke J. & Manning, Alan & Oberfichtner, Michael, 2019. "The urban wage premium in imperfect labour markets," LSE Research Online Documents on Economics 102629, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:102629
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    More about this item

    Keywords

    urban wage premium; imperfect labour markets; monopsony; search frictions;
    All these keywords.

    JEL classification:

    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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