Want a Pay Rise? Don't Just Change Jobs, Change Cities!

Workers looking for a salary increase should not only consider average wages in a city. High average pay can simply reflect a concentration of highly skilled, well-paid talent. The real advantage lies in cities that boost productivity and wages for nearly all workers through agglomeration effects, rather than merely gathering the best talent. Two people could work in a similar industry, have comparable experience, and even do the same job, yet their salaries could differ significantly simply because they live in different cities. While many assume this gap is entirely down to individual ability, a worker’s location plays a major role. Research led by Gaurav Khanna from the University of California San Diego sought to separate the influence of individual ability from the effect of the city itself. Instead of comparing average wages between cities, the study tracked workers as they moved from one city to another. This method allowed researchers to see how much of a pay rise or cut genuinely stemmed from the change in location, rather than differences between the workers. Within a single country, 45% to 73% of the wage gap between cities is explained by the location itself, with the remainder attributed to individual characteristics like skill, experience, or education. When comparing across countries, the influence of location becomes far more dominant. After accounting for purchasing power and inflation, around 93% of the wage gap originates from where a person works. This means a city plays a determining role in a worker’s economic value. Cities that offer a location premium are not simply those with a higher cost of living or more skyscrapers; what sets them apart is their productivity level. When many firms cluster in one area, business activity becomes more efficient. Companies find it easier to recruit, workers have more job options, suppliers are closer, and ideas and innovation spread more quickly between firms. This efficiency ultimately boosts productivity, and as companies generate more value, they have more room to pay higher wages. However, these benefits do not always materialise, especially in developing countries. Research found that large cities often face obstacles that reduce the advantages of dense economic activity. Expensive housing, traffic congestion, and unreliable electricity supplies all increase the cost of doing business. This not only affects workers but also makes it harder for the most productive firms to expand. As a result, job creation is often concentrated in less productive companies that can absorb labour but typically offer lower wages than more efficient firms. Simulations show that if the most productive cities in India could accommodate a proportion of workers similar to productive cities in the United States, the national average wage would rise by an estimated 2.3%. If workers also moved to the most productive firms, the average wage increase in India could reach 4.3%. Similar effects were observed in other countries, with simulations showing potential average wage gains of around 5% in Mexico and 8% in Nigeria through more efficient distribution of labour and firms. This suggests that income growth does not always require better skills or longer working hours. In some cases, simply improving urban planning and labour allocation can boost both productivity and public income.