Spatial Sorting: Why New York, Los Angeles and Detroit Attract the Greatest Minds as Well as the Unskilled
University College London - Department of Economics
Federal Reserve Banks - Federal Reserve Bank of Cleveland
December 13, 2010
CESifo Working Paper Series No. 3274
We propose a theory of skill mobility across cities. It predicts the well documented city size-wage premium: the wage distribution in large cities first-order stochastically dominates that in small cities. Yet, because this premium is reflected in higher house prices, this does not necessarily imply that this stochastic dominance relation also exists in the distribution of skills. Instead, we find there is second-order stochastic dominance in the skill distribution. The demand for skills is non-monotonic as our model predicts a “Sinatra” as well as an “Eminem” effect: both the very high and the very low skilled disproportionately sort into the biggest cities, while those with medium skill levels sort into small cities. The pattern of spatial sorting is explained by a technology with a varying elasticity of substitution that is decreasing in skill density. Using CPS data on wages and Census data on house prices, we find that this technology is consistent with the observed patterns of skills.
Number of Pages in PDF File: 48
Keywords: matching theory, sorting, general equilibrium, population dynamics, cities, wage distribution
JEL Classification: J31, R10, R23
Date posted: December 14, 2010
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