Where To Make More Money

Sometimes a higher wage might not entirely depend on hard work, skills, and brains.

It could depend on where you live:

High Wage Cities

In a recent paper, researchers from UC San Diego and Northwestern investigated earnings differences. They wanted to know how much the worker mattered and how much it was the city. As a result, they had to determine if the reason for a high wage location was worker sorting–a concentration of high income people–or something about the place itself.

With data from 513 million workers in 191 countries, and 220,000 locations, they concluded that the size, industrial diversity, and migration friendliness of a high wage city lets it allocate workers to high productivity firms. Consequently, the city effect elevates its workers’ wages.

Predictably, developed nations host many of the highest value cities:

But also, the city effect varies inside countries. In the U.S., higher wage cities are mostly located along the east and west coasts whereas for India, it’s the south and west:

Our Bottom Line: Economic Growth

So yes, the software engineer that moves from Bangalore to San Francisco will earn more. One reason is the importance of the place.  Researchers estimate that the city effect can account for more than 50% of the wage difference.

Knowing why a city pays well has a micro and macro impact. On the micro level, indivdual workers can more selectively identify the ideal place to migrate. They can choose cities that are genuinely more productive. Then, on the national level, recognizing what makes a high value city can help policy makers nurture the characteristics that create them.

Together, it all adds up to how countries can dissect a phenomenon to see what makes it tick. We can hope that once policy makers know what creates the city effect, they can unlock its economic growth.

My sources and more: Thanks to The Economist for inspiring today’s post and alerting us to this paper.