Modern urban hubs present a paradox: they offer both the highest wages and the greatest inequality. In Paris, the average wage is 65% higher than in mid-sized French cities, yet low-income workers there earn only 2% more nominally and 20% less after accounting for housing costs. This raises fundamental questions: Why are wages higher in larger cities? How come the best and worst opportunities cohabit in these places? And why would a worker move there if they earn less after housing costs?
To understand these spatial wage patterns, Hugo Lhuillier analyzes comprehensive French matched employer-employee data tracking workers across their careers and locations. By comparing workers who move between employers, this approach isolates how jobs shape wages within and across cities. The analysis reveals two novel facts:
- High-paying jobs are concentrated in large cities while low-paying jobs are dispersed throughout space. In Paris, 17.9% of jobs rank in the top 10% nationally compared to only 6.9% in mid-sized cities. Conversely, low-paying jobs appear equally across all locations. Which jobs are where matters for spatial wage inequality: it explains 34% of why wages are higher in bigger places, and 33% of why there are more dispersed there.
- Workers earn high wages in large cities over time as they climb steeper job ladders. Starting wages in Paris are similar to those in mid-sized cities after controlling for worker characteristics. However, workers experience greater wage gains whenever they switch jobs: each switch delivers 1.5 percentage points higher wages than in mid-sized cities. Over time these gains compound and create substantial divergence, with workers in Paris earning 14% higher wages by age 55.
These findings challenge standard explanations for spatial wage inequality. If cities simply had higher productivity, wages would be higher for all workers rather than concentrating at the top. If the explanation were purely stemming from worker heterogeneity, we would not observe systematic wages gains as workers reallocate across jobs.
To explain these patterns, Lhuillier develops a theoretical model where companies strategically choose where to produce and hire workers, while workers’ careers are shaped by local job ladders. The key insight is that productive employers concentrate in large cities to access larger worker pools and sidestep hiring frictions. This creates fiercer competition for workers, but the benefits are asymmetric. On the one hand, superstar employers must offer disproportionally high wages to face off the local competition. On the other hand, workers coming out of unemployment cannot reap the productivity gains of large cities as they have little bargaining power. Higher average wages and greater inequality follows.
To assess the impact of employers on spatial inequality, Lhuillier builds a quantitative version of the model and estimates it using firm-level data. The model’s predictions align with the data, and deliver three quantitative takeaways:
- Employers’ productivity, rather than inherent local productivity, is at the root of spatial wage gaps. This matters as the former is not policy invariant.
- Large cities offer higher lifetime earnings. Despite facing 8.1% lower real wages initially, workers in Paris enjoy 4.2% higher lifetime real earnings than in mid-size cities thanks to the steeper local job ladder.
- Large cities rely on a dynamic labor market. A counterfactual analysis shows that reducing the job switching rate nationally by one percentage point—as occurred in many countries during the 1990s and 2000s— would reduce Paris’s size by 22% and its productivity by 2 percentage points as its comparative advantage diminishes.
These findings offer a new explanation for the high wages found in cities. Rather than stemming from higher local productivity, wage advantages primarily result from the sorting of productive employers who compete intensely for talent. This competition creates job ladders that benefit workers throughout their careers, making cities attractive despite their costs. Understanding these dynamics is crucial for policies aimed at reducing spatial inequality while preserving the innovation and dynamism that make cities economic engines.