Return to skills and labour market size

Several studies document that skills are strong predictors of earnings; however, less is known about the extent to which labour market size influences the return to skills. Using data from a unique representative survey recording the skill requirements of Hungarian firms, we show that social skills have higher returns in large urban labour markets. Surprisingly, this pattern cannot be observed for cognitive skills, while the return to manual skills slightly decreases with labour market size. Our estimates are robust to different agglomeration measures, additional controls and estimation methods; however, returns to skills seem to vary considerably across worker groups.