Does It Pay to Live in Big(Ger) Cities? The Role of Agglomeration Benefits, Local Amenities, and Costs of Living

39 Pages Posted: 2 Mar 2017

See all articles by Rudiger Ahrend

Rudiger Ahrend

Centre for Entrepreneurship, SMEs, Regions and Cities

Alexander Lembcke

London School of Economics & Political Science (LSE)

Date Written: December 15, 2016

Abstract

This study approaches the question whether it “pays” to live in big(ger) cities in a three-fold manner: first, it estimates how city size affects worker productivity (agglomeration benefits) in Germany, based on individual-level wage data. Second, it considers whether productivity benefits translate into real gains for workers by taking local price levels into account. Third, it examines the role of amenities in explaining differences in real benefits across cities. The estimated elasticity for agglomeration benefits is around 0.02, implying that comparable workers in Hamburg (3 million residents) are about 6% more productive than in Recklinghausen (150 000). But agglomeration benefits are, on average, offset by higher prices, i.e. city size does not systematically translate into real pecuniary benefits for workers. Amenities, e.g. seaside access, theatres, universities, or “disamenities”, e.g. air pollution, explain – to a large degree – variation in real pecuniary benefits, i.e. real wages are higher in low-amenity cities.

Keywords: cost of living, agglomeration costs, cities, local amenities, agglomeration benefits, Functional Urban Areas

JEL Classification: J31, R12, R23

Suggested Citation

Ahrend, Rudiger and Lembcke, Alexander, Does It Pay to Live in Big(Ger) Cities? The Role of Agglomeration Benefits, Local Amenities, and Costs of Living (December 15, 2016). OECD Working Paper No. 9/2016, Available at SSRN: https://ssrn.com/abstract=2925676 or http://dx.doi.org/10.2139/ssrn.2925676

Rudiger Ahrend

Centre for Entrepreneurship, SMEs, Regions and Cities ( email )

2 rue Andre Pascal
Paris, 75016
France
75016 (Fax)

Alexander Lembcke (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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