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

Author Name MORIKAWA Masayuki  (Vice Chairman & Vice President, RIETI)
Creation Date/NO. April 2011 11-J-046
Research Project Empirical Analysis of Japan's Labor Market: Policy Responses to Fertility Decline and Population Aging
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A large number of studies have indicated that densely populated cities enhance the productivity of workers through knowledge spillover and a better 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, a relatively higher agglomeration wage premium is observed for several service sectors, including the wholesale and retail industries. The agglomeration premium is larger for workers with higher observable skills such as education, tenure, and potential experience, which suggests rapid learning and a better matching in the densely populated cities. Under structural changes such as a declining population and trend toward a knowledge-based service economy, forming densely populated areas by facilitating the migration of workers has desirable effects on both individual wages and firm productivity throughout Japan.