Thursday, August 18, 2011

Urban Density, Human Capital, and Productivity: An empirical analysis using wage data 
Numerous studies have indicated that densely populated cities enhance the productivity of workers through knowledge spillover and superior matching with employers in the labor market. This paper quantitatively analyzes the relationship among urban density, human capital, and wages by using micro data from the Basic Survey on Wage Structure for the years from 1990 to 2009. According to the estimation of standard wage functions augmented with population density, the agglomeration premium is larger for workers with higher observable skills such as education, tenure, and potential experience, which suggests rapid learning and superior matching in densely populated cities. Under structural changes such as a declining population and the trend toward a knowledge-based service economy, forming densely populated areas by facilitating the migration of workers has desirable effects throughout Japan on both individual wages and firm productivity.
The major results can be summarized as follows:
(1) Simple raw elasticity of nominal wages with respect to municipal population density is about 0.08. After controlling for individual worker characteristics and firm size, this figure decreased to roughly 0.05. By further adjusting regional price disparities, the real wage elasticity becomes about 0.03. This figure is comparable with those found in previous studies.
(2) The agglomeration wage premium is larger for university graduates. This suggests that agglomeration economies and worker skills are complementary.
(3) The wage elasticity to density increases with the tenure of workers up to around 20 years. This result indicates that human capital accumulation through learning by experience within a firm is relatively large in establishments located in densely populated cities.
(4) The wage elasticity to density also increases with the potential experience of workers up to around 30 years of experience. This relationship is stronger for “non-standard employees” who experienced job changes than “standard employees” who served at a single firm for long time. This result suggests that, in addition to the learning effects, superior matching between workers and firms through labor turnover contribute to the urban wage premium.

The full paper is available free of charge at

by Masayuki Morikawa
Ministry of Economy, Trade and Industry (METI)
1-3-1, Kasumigaseki Chiyoda-ku, Tokyo, 100-8901 11th floor, Annex; Phone: +81-3-3501-1363, Fax: +81-3-3501-8577
July, 2011; 28 pages
via Research Papers in Economics (REPEC)

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