Urban Wage Premium Revisited: Evidence from Japanese matched employer-employee data

Recent studies on the empirics of agglomeration economies have assumed a two-step channel of the urban wage premium in which agglomeration increases total factor productivity (TFP) and results in higher wages. Therefore, the present study empirically examines the validity of this two-step channel via TFP and investigates other channels of the urban wage premium by using matched employer-employee data in the Japanese manufacturing sector. The findings show that the standard wage regression approach used in the literature captures not only the TFP channel of the urban wage premium but also other effects (e.g., firm size effects on wage). Furthermore, when this TFP channel is quantified, the city size elasticity of wage becomes smaller than those in the existing literature. The implication of this study is that, by exploiting the features of the Japanese employment system, it is possible to obtain interesting results concerning the urban wage premium, especially in regard to basic pay and bonuses.