The Effect of Working from Home on the Agglomeration Economies of Cities: Evidence from Advertised Wages

Abstract

Using job posting wage data, we find a substantial decrease in the urban wage premium for occupations with high working-from-home (WFH) adoption following the COVID-19 pandemic, accompanied by an employment shift away from large cities. Based on a conceptual framework, the empirical findings suggest that WFH adoption lowered the productivity premium of large cities. A skill-level decomposition reveals that the urban wage premium decline was largely driven by reduced urban wage returns for interpersonal skills, suggesting that the reduced urban productivity premium was a result of weakened agglomeration economies due to decreased interpersonal interactions in large cities.

Keywords: Agglomeration, Productivity, Spillover, Urban Wage Premium, Working from Home, Remote, Virtual, WFH, Wages, Job Posting, COVID-19, Pandemic

JEL Classification: R12, R23, J24, J31