Want a Pay Rise? Don't Just Change Jobs, Change Cities!
Workers looking to move for a higher salary cannot rely solely on the average wages of a given city. High wages may simply reflect a large concentration of highly skilled workers who are already well paid.
The most advantageous cities to move to are those that can raise the productivity and wages of almost all workers through agglomeration effects, rather than merely gathering the best talent.
Two people can work in similar industries, have comparable experience, and even perform the same job. Yet their salaries can differ considerably simply because they live in different cities.
Many people have long assumed these gaps are entirely determined by individual ability. In fact, where a person works also plays a significant role.
Where you live has a ‘price’
Research led by Gaurav Khanna of the University of California San Diego sought to separate the influence of individual ability from the influence of the city where a person works.
The method did not compare average salaries between cities, but instead tracked workers as they moved from one city to another. This allowed the researchers to see how much of the rise or fall in wages genuinely stemmed from the change of location, rather than from differences between workers.
Within a single country, around 45%-73% of the differences in wages between cities are explained by location itself. The remainder comes from individual characteristics such as ability, experience or education.
When the comparison is made between countries, the influence of location becomes far more dominant. After accounting for purchasing power and inflation, around 93% of the wage gap comes from where a person works.
In other words, the city is a factor that helps determine a worker’s economic value.
Why can a city raise your salary?
Cities that offer a wage premium are generally not simply those with a high cost of living or more skyscrapers. What sets them apart is their level of productivity.
When many firms cluster in one area, business activity becomes more efficient. Firms find it easier to recruit workers, workers have more job options, suppliers are closer, and ideas and innovation move more quickly from one company to another.
That efficiency ultimately raises productivity. When firms can generate more value, they also have room to pay their workers higher wages.
The obstacles come from the city itself
However, these benefits do not always materialise, particularly in developing countries.
The research found that large cities often face constraints that reduce the gains from dense economic activity. Expensive housing, congested transport and unreliable electricity supplies all raise the cost of doing business.
The impact is not felt by workers alone. The most productive firms also find it harder to grow because they face various operational hurdles.
As a result, more jobs are created at firms with lower productivity. These firms can indeed absorb labour, but they generally offer lower wages than more efficient companies.
Better cities show up directly in your payslip
The researchers then simulated what would happen if these constraints were reduced.
The results show that if India’s most productive cities could accommodate the same proportion of workers as productive cities in the United States, average national wages would rise by an estimated 2.3%.
The effect would be greater if workers also moved to the most productive firms. In that scenario, the increase in average wages in India is estimated at 4.3%.
A similar effect is seen in other countries. Simulations suggest average wages could rise by around 5% in Mexico and 8% in Nigeria through a more efficient distribution of labour and firms.
This shows that higher incomes do not always have to come from improved skills or longer working hours. Under certain conditions, better urban governance and labour allocation alone can raise productivity and, with it, people’s incomes.