Large American cities have disproportionately large shares of highly educated workers, a growing trend in recent decades.1 What’s the draw? Money for one thing, naturally. Not only do big-city firms generally pay higher wages; there is also evidence that the differential is greater for those with more education. These higher wages raise interesting questions: Why do firms in big cities find it profitable to pay more? That is, what makes a well-educated city worker more valuable than a comparably educated worker in a small town? And it’s not just about money: Evidence suggests that amenities are increasingly important factors in where people choose to live, and big cities appear to provide greater amenities for higher-income workers than small cities do. But which is the bigger draw — higher wages or better amenities? As this article will show, cities may have a stake in the answer.

This article will focus on two channels through which relative advantages can arise for highly skilled or educated workers in big cities.2 First, there may be gains in productivity in the sense that people with similar skill levels doing the same job produce more in big cities relative to smaller ones. Additionally, direct relative advantages for college-educated individuals in cities arise through what are known as skill-biased technological advantages. Put another way, while cities generally improve productivity for all workers, the production advantages of large cities may benefit different skill groups to different degrees. Furthermore, certain industries may be more productive than others in large cities, and these industries may be more likely to employ highly skilled workers. Disentangling these effects is not simple. Second, big cities may offer some advantages through consumption amenities. These consumption amenities may be innate, such as good weather or natural beauty, or may arise from access to a greater variety of goods and services available only in large urban areas.

This article appeared in the Third Quarter 2015 edition of Business Review. Download and read the full issue.

[1]For the purposes of this article, city refers to geographically separated labor markets. In the U.S., they are usually defined by metropolitan statistical area (MSA).

[2]In this article, skilled and educated will be used interchangeably. While their meaning is obviously not precisely the same, education is easier to measure and therefore often used as a proxy for skill level.