Urban Density, Human Capital, and Productivity: An empirical analysis using wage data

Numerous studies have indicated that densely populated cities enhance the productivity of workers through knowledge spillover and superior matching with employers in the labor market. This paper quantitatively analyzes the relationship among urban density, human capital, and wages by using micro data from the Basic Survey on Wage Structure for the years from 1990 to 2009. According to the estimation of standard wage functions augmented with population density, the agglomeration premium is larger for workers with higher observable skills such as education, tenure, and potential experience, which suggests rapid learning and superior matching in densely populated cities. Under structural changes such as a declining population and the trend toward a knowledge-based service economy, forming densely populated areas by facilitating the migration of workers has desirable effects throughout Japan on both individual wages and firm productivity.

This paper is the English version of the Japanese Discussion Paper (11-J-046).