The Urban Wage Premium: Sources and the Economic Mechanism

Abstract

 This study estimates the unobserved work experience (UWP) of employment among university graduates and provides new evidence on the nature of sorting and on the heterogeneity in the UWP by measures of cognitive ability. Drawing on recent advances in the literature on selection on unobservables, we show how to control for heterogeneity in the characteristics of individuals that choose to live in cities to address endogenous sorting. We estimate the dynamic effects of work experience at different levels of the urban hierarchy, the variation of these dynamic effects by observed ability of workers, and the portability. We find clear evidence of systematic positive sorting of workers on observed indicators of ability as well as on unobservable productive traits. Specifically, we show that workers who have at some point worked in a city experience faster wage growth. Our findings are in line with the notion that a substantial part of the urban wage premium derives from fiercer competition in thick labor markets.