Cities, Wages and the Urban Hierarchy

Juan D. Soto Daz

Advisor: Dusan Paredes
Department of Economics
Universidad Cat olica del Norte
June 26, 2014
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 1 / 31
OUTLINE
Motivation
Problem and Research Question
Objectives
Theoretical Framework
Methodology
Results
Conclusion
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 2 / 31
MOTIVATION

Persistent Spatial Disparities

Hierarchy and size of cities

The economic geography of Chile

Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 3 / 31
SIZE VS HIERARCHY
Figure 1 : Hierarchy and size of cities
y n

y
y
yn
Small City (D)
Big City(A)
Medium City(B)
Small City (C)
Figure 2 : The urban hierarchy on CPT
t
tin
r
r
ti
^
]

A
B
C
D
E
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 4 / 31
THE ECONOMIC GEOGRAPHY OF CHILE
Figure 3 : Population interregional distribution Figure 4 : The hierarchy of cities in Chile
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 5 / 31
OUTLINE
Motivation
Problem and Research Question
Objectives
Theoretical Framework
Methodology
Results
Conclusion
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 6 / 31
PROBLEM AND RESEARCH QUESTION
Average difference on wages across city size
-
.
4
-
.
3
-
.
2
-
.
1
0
P
e
r
c
e
n
t

D
i
f
f
e
r
e
n
c
e

o
n

W
a
g
e
s
5,600k < 800k < 300k < 200k < 100k
City Size
log p w
i
11.78 `0.061 log pop
c
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 7 / 31
PROBLEM AND RESEARCH QUESTION
What is the role that play the system of cities, conceptualized as urban hierarchy, in
explain wage disparities across cities?
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 8 / 31
OUTLINE
Motivation
Problem and Research Question
Objectives
Theoretical Framework
Methodology
Results
Conclusion
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 9 / 31
OBJECTIVES
General Objective

Estimate the size of the wage premiums required to offset the remoteness
incurred by workers over and above the city size wage gap for the Chilean case
using data since 1992 to 2011.
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 10 / 31
OBJECTIVES
Specic Objectives

Dene Urban Hierarchy (Central Place Theory, Christaller, 1933)

Compute the Incremental Distance as an approximation of a size based Urban

Hierarchy

Pseudo-correction by Cost of Living and Productivity Differentials

Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 11 / 31
HYPOTHESIS
1. Urban tiers represents signicant wage differences
2. City size wage gap masking wages differences between urban tiers
3. Central Place Theory provides a better understanding than city size for the study
of cities wage gap in Chile
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OUTLINE
Motivation
Problem and Research Question
Objectives
Theoretical Framework
Methodology
Results
Conclusion
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 13 / 31
THE MODEL
The problem for the representative worker is
max
x,l
c
Upx, l
c
; sq
s.t. w` I x `l
c
r,
where x is the amount of commodity consumed, l
c
the residential land used, s is the
level of the amenity, w the wage and r the rent. Therefore, the equilibrium condition is:
Vpw, r; sq k (1)
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 14 / 31
THE MODEL
Figure 5 : Workers equilibrium condition
r
w
V (w, r; s)
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 15 / 31
THE MODEL
For the representative rm the problem is
min
w,r
Cpw, r; sq
s.t. X f pl
p
, N; sq,
assuming constant returns to scale. Where l
p
is the land used for production and N the
total number of workers in the city. The rms equilibrium conditions is given by the
unity cost function:
Cpw, r; sq 1 (2)
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 16 / 31
THE MODEL
Figure 6 : Firms equilibrium condition
r
w
C(w, r; s)
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 17 / 31
THE MODEL
The total differential of (1) and (2), and solving for dw{ds and dr{ds, gives:
dw
ds

1

pV
1
prqC
1
psq C
1
prqV
1
psqq 0 (3)
dr
ds

1

pC
1
pwqV
1
psq C
1
psqV
1
pwqq 0 (4)
where C
1
prqV
1
pwq V
1
prqC
1
pwq 0.
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 18 / 31
THE MODEL
Figure 7 : The remoteness on the spatial equilibrium model
r
w
C
s
1
< s
2
V(w, r; s
2
)
C(w, r; s
2
)
V(w, r; s
1
)
C(w, r; s
1
)
B
A
w
1
r
1
w
2
r
2
w
3
r
3
Source: Adapted from Roback (1982).
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 19 / 31
OUTLINE
Motivation
Problem and Research Question
Objectives
Theoretical Framework
Methodology
Results
Conclusion
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 20 / 31
URBAN HIERARCHY
Figure 8 : City size distribution
Source: Authors.
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 21 / 31
URBAN HIERARCHY
Figure 9 : Urban tiers
Source: Authors.
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THE INCREMENTAL DISTANCE
Figure 10 : The incremental distance
Source: Authors.
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 23 / 31
ESTIMATION
An approximation estimation for Combes, Duranton Gobillon (2012) is:
log w
i

0
`
1
log pop
c
`
r
r

r1

c
`
k
k

k1

i,k
`
h
h

h1
D
h
`
i
(5)
Model 2 incorporates four dummies for the size-based hierarchy of cities previously
dened as tier
l
:
log w
i

0
`
1
log pop
c
`
l
`
l

l1
tier
l
`
r
r

r1

c,r
`
k
k

k1

i,k
`
h
h

h1
D
h
`
i
(6)
Model 3 includes the incremental distance variable (incdist
j
).
log w
i

0
`
1
log pop
c
`
l
l

l1
tier
l
`
j
j

j1
incdist
j
`
r
r

r1

c.r
`
k
k

k1

i,k
`
h
h

h1
D
h
`
i
(7)
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 24 / 31
OUTLINE
Motivation
Problem and Research Question
Objectives
Theoretical Framework
Methodology
Results
Conclusion
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 25 / 31
RESULTS
Table 1 : Summary statistics of wages and remoteness by urban tiers
Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 Total
Log of wages 12.126 11.883 12.097 12.014 11.761 11.884
(0.867) (0.878) (0.920) (0.899) (0.835) (0.870)
Incremental distance:
to tier 1 0 384 117 235 223 183
(163) (140) (177) (176) (185)
to tier 2 0 0 740 413 188 207
(662) (551) (321) (399)
to tier 3 0 0 0 344 95 90
(629) (262) (298)
to tier 4 0 0 0 0 60 35
(191) (149)
Notes: Mean and standard deviation (in parentheses).
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 26 / 31
RESULTS
Table 2 : Regressions of wages
Regressor Model 1 Model 2 Model 3 Model 4
Log of population 0.030*** 0.007*** 0.005*** -0.001
(0.001) (0.001) (0.002)
Tier 2 -0.147*** -0.048*** -0.008
(0.005) (0.006) (0.009)
Tier 3 -0.132*** -0.083*** -0.046***
(0.006) (0.006) (0.011)
Tier 4 -0.127*** -0.103*** -0.094***
(0.006) (0.006) (0.011)
Tier 5 -0.148*** -0.139*** -0.135***
(0.008) (0.008) (0.013)
Inc. dist. to tier 1 -0.046*** -0.044***
(0.001) (0.002)
Inc. dist. to tier 2 0.001*** -0.007***
(4e-04) (0.001)
Inc. dist. to tier 3 0.012*** 0.012***
(0.001) (0.001)
Inc. dist. to tier 4 0.029*** 0.031***
(0.001) (0.001)
Observations 540,845 540,845 538,674 240,792
R-squared adjusted 0.527 0.528 0.531 0.43
F-Statistic 2e+04 1.7e+04 1.6e+04 4,942
* p 0.05, ** p 0.01, *** p 0.001. Standard error in parentheses.
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 27 / 31
RESULTS
Figure 11 : City size wage gap and the urban hierarchy effect
-
.
1
5
-
.
1
-
.
0
5
P
e
r
c
e
n
t

D
i
f
f
e
r
e
n
c
e

o
n

W
a
g
e
s
Tier 5 Tier 4 Tier 3 Tier 2
Urban Tier
City Size Wage Gap
Urban Hierarchy Wage Gap
Source: Authors.
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 28 / 31
RESULTS
Table 3 : Remoteness effects over regions
North South Center
Incremental distance to tier 1 -0.130*** -0.034*** -0.057***
(0.008) (0.002) (0.001)
Incremental distance to tier 2 0.094*** 0.132*** -0.088***
(0.002) (0.004) (0.002)
Incremental distance to tier 3 0.095*** 0.089*** -0.079***
(0.006) (0.006) (0.005)
Incremental distance to tier 4 0.226** 0.227*** -0.203***
(0.018) (0.018) (0.018)
* p 0.05, ** p 0.01, *** p 0.001. Standard error in parentheses. R-square = 0.59 and n=538,674.
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 29 / 31
OUTLINE
Motivation
Problem and Research Question
Objectives
Theoretical Framework
Methodology
Results
Conclusion
Cities, Wages and the Urban Hierarchy IDEAR-MCR Juan D. Soto Daz 30 / 31
CONCLUSION

We have introduced the importance of considering a more complex hierarchy of

cities in the city size wage gap estimation

We found always a loss in wages in the remoteness to the main urban center but a
differentiated effect across remote northern and southern cities

Future research has to been focused in understanding better relationships between

cities
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