Department of Economics Working Paper Series Wage Premia in Employment Clusters: Agglomeration Economies or Worker Heterogeneity?

The correlation between wage premia and concentrations of firm activity may arise due to agglomeration economies or workers sorting by unobserved produc-tivity. A worker’s residential location is used as a proxy for their unobservable productivity attributes in order to test whether estimated work location wage pre-mia are robust to the inclusion of these controls. Further, in a locational equilib-rium, identical workers must receive equivalent compensation so that after con-trolling for residential location (housing prices) and commutes workers must be paid the same wages and only wage premia arising from unobserved productivity differences should remain unexplained. The models in this paper are estimated using a sample of male workers residing in 33 large metropolitan areas drawn from the 52000 U.S. Decennial Census. We find that wages are higher when an individual works in a location that has more workers or a greater density of workers. These agglomeration effects are robust to the inclusion of residential location controls and disappear with the inclusion of commute time suggesting that the effects are not caused by unobserved differences in worker productiv-ity. Extended model specifications suggest that wages increase with the education level of nearby workers and the concentration of workers in an individual’s own industry or occupation