Abstract: This paper studies the effect of spatial sorting on inequality through two channels: spatial differences in technology and the endogenous organization of production. First, I document a new fact on the spatial differences in the organization of production. The number of workers per manager is decreasing in city size, overall and within industries. I develop and quantify a model of a system of cities where workers of different skills organize in production teams. The model yields continuous wage distributions in cities of different sizes that resemble the data. I find that technology differs across cities in its productivity but also in its complexity, so there are no incentives for it to diffuse across cities. I then use the model to evaluate two local policies that are designed to address income inequality: a minimum wage and a housing subsidy. I find that a revenue neutral housing subsidy is more effective than a minimum wage at reducing inequality, measured by the variance of log wages.
Establishment and City Size Premia: Evidence from Spanish Administrative Data (with Hannah Rubinton and Charly Porcher)
Abstract: This paper studies the role of establishment size composition in explaining the city-size earnings premium. Using administrative data from Spain, we first document a strong positive correlation between city size and establishment size, measured as the number of co-workers. The establishment size for a typical worker is 33% larger in a city with twice the population density, even after controlling for worker fixed effects and other observable characteristics. We then decompose the city-size earnings premium into two components: the increase in earnings coming from the increase in establishment size, and the within establishment-size premium. We find that 39.1% of the static gains of moving to a city twice larger can be explained by a transition to a better-paying larger establishment. In contrast, only 5% of the dynamic gains of accumulating experience in a large city can be attributed to a faster growth of establishment size. Moreover, we find substantial heterogeneity in the importance of each component for different industries, education levels, and for different city pairs.