Centre for Vocational Education Research LSE RSS Email Facebook Twitter


CEP discussion paper
The urban wage premium in imperfect labour markets
Boris Hirsch, Elke J. Jahn, Alan Manning and Michael Oberfichtner
March 2019
Paper No' CEPDP1608:
Full Paper (pdf)

JEL Classification: R23; J42; J31

Tags: urban wage premium; imperfect labour markets; monopsony; search frictions

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.