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

54 Pages Posted: 20 May 2022

See all articles by Sitian Liu

Sitian Liu

Queen's University - Department of Economics

Yichen Su

Federal Reserve Bank of Dallas

Date Written: May 13, 2022

Abstract

We analyze the effect of working from home on the agglomeration economies of large cities and the aggregate productivity implications of such effect. Using advertised wages from job ads, we show that occupations with the highest work-from-home adoption during the COVID-19 pandemic saw a strong decrease in the urban wage premium. The decline in the urban wage premium is accompanied by an exodus of employment (based on firms' locations) from large cities to small cities. In contrast, occupations with low or moderate levels of work-from-home adoption saw little overall reduction in the urban wage premium. The empirical evidence in our paper points to weakened agglomeration economies in large cities among professions with the highest prevalence of working from home. A decomposition exercise reveals that a sizable portion of the decline in the urban wage premium is driven by the decline in the urban wage premium of relationship-building skills, suggesting the decreased agglomeration effect in large cities is at least partially a result of reduced occurrence of interactive activities.

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

Suggested Citation

Liu, Sitian and Su, Yichen, The Effect of Working from Home on the Agglomeration Economies of Cities: Evidence from Advertised Wages (May 13, 2022). Available at SSRN: https://ssrn.com/abstract=4109630

Sitian Liu

Queen's University - Department of Economics ( email )

94 University Avenue
Kingston, Ontario K7L 3N6
Canada

HOME PAGE: http://www.sitian-liu.com

Yichen Su (Contact Author)

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

HOME PAGE: http://https://sites.google.com/site/yichensu89/

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