The Local Root of Wage Inequality

Wages vary substantially between and within cities. While wages are on average higher in larger cities, the real earnings of low-wage workers are lower. Using French matched employer-employee data, I document two novel facts that highlight the role of employers in shaping between- and within-city inequality jointly. First, high-paying jobs are concentrated in large cities whereas low-paying jobs are present throughout space. Second, the wage gains offered by large cities materialize over time as workers reallocate from low- to high-paying jobs. I propose a spatial framework that rationalizes these facts through two ingredients: heterogeneous employers and frictional local labor markets with on-the-job search. Productive employers agglomerate in large cities to hire more workers. Fiercer competition for workers arises. A higher average wage, faster growth, and greater within-city inequality follow. I estimate the model and quantify that local TFP gaps are minimal once I account for employers’ incentives to sort by size. The steeper ladder of large cities implies higher lifetime real earnings for every local worker, including those with lower real wages.