The Wage Gap between Metropolitan and Non-metropolitan Areas

Abstract

In the literature on measured wage inequality, only one recent study, by Glaeser and Mare (2001), has focused on the enormous wage gap between urban and non-urban workers in the United States. In the present paper, I replicate and extend Glaeser and Mare 's original empirical work, and I present a new interpretation of the evidence based on my re-estimation. Contrary to Glaeser and Mare 's theory that urban employment induces more rapid skill acquisition, I find that wage growth is no greater for urban workers than for non-urban workers. I show that both the original and extended empirical patterns can be fully explained by a simple spatial equilibrium model that incorporates two highly plausible phenomena: (1) a compensating wage differential for the higher cost of living in cities and (2) a dynamic tendency for more able workers to gravitate to cities once they discover that they belong in the "big leagues.

Keywords: urban/non-urban wage gap, real wage gap, dynamic ability sorting, and market learning

JEL Classification: J31