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Cities, Wages, and the Urban Hierarchy

Conference Paper · July 2014

DOI: 10.13140/2.1.3087.7444

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Juan Daniel Soto Díaz Dusan Paredes

The London School of Economics and Political Science Universidad Católica del Norte (Chile)
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 Cities, Wages, and the Urban Hierarchy

Juan D. Soto - Dusan Paredes

Department of Economics
Universidad Católica del Norte

September 30, 2014

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 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 - Dusan Paredes 2 / 31
M OTIVATION

§ Persistent Spatial Disparities

§ Hierarchy and size of cities

§ The economic geography of Chile

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 3 / 31
S IZE VS HIERARCHY

Figure 1 : Hierarchy and size of cities

y Small City (D)

Figure 2 : The urban hierarchy on CPT

n
ti
A

nBig City (A)
y ]r
 D r C
ti

t

E^
nM edium City (B)
y B

y Small City (C)

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 4 / 31
T HE ECONOMIC GEOGRAPHY OF C HILE

Figure 3 : Population interregional distribution Figure 4 : The hierarchy of cities in Chile

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 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 - Dusan Paredes 6 / 31
P ROBLEM AND RESEARCH QUESTION

Average difference on wages across city size

0
Percent Difference on Wages
-.1
-.2
-.3

log w
pi “ 11.78 ` 0.061 log popc
-.4

< 100k < 200k < 300k < 800k 5,600k

City Size

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 7 / 31
P ROBLEM AND R ESEARCH Q UESTION

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 - Dusan Paredes 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 - Dusan Paredes 9 / 31
O BJECTIVES

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 - Dusan Paredes 10 / 31
O BJECTIVES

Specific Objectives
§ Define 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 - Dusan Paredes 11 / 31
H YPOTHESIS

1. Urban tiers represents significant 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

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 12 / 31
OUTLINE

Motivation

Problem and Research Question

Objectives

Theoretical Framework

Methodology

Results

Conclusion

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 13 / 31
T HE M ODEL

The problem for the representative worker is

max Upx, l c ; sq
x,l c
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 - Dusan Paredes 14 / 31
T HE M ODEL
Figure 5 : Workers equilibrium condition

V (w , r ; s)

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 15 / 31
T HE M ODEL

For the representative firm the problem is

min Cpw, r; sq
w,r
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 firms 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 - Dusan Paredes 16 / 31
T HE M ODEL
Figure 6 : Firms equilibrium condition

C (w , r ; s)

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 17 / 31
T HE M ODEL

The total differential of (1) and (2), and solving for dw{ds and dr{ds, gives:

dw 1
“ pV 1 prqC1 psq ´ C1 prqV 1 psqq ¡ 0 (3)
ds ∆
dr 1
“ pC1 pwqV 1 psq ´ C1 psqV 1 pwqq ă 0 (4)
ds ∆
where ∆ “ C1 prqV 1 pwq ´ V 1 prqC1 pwq ą 0.

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 18 / 31
T HE M ODEL
Figure 7 : The remoteness on the spatial equilibrium model

w
s1 < s2

V (w , r ; s2 )
V (w , r ; s1 )

A
w1
w3 C
C (w , r ; s1 )
B
w2
C (w , r ; s2 )

r
r3 r2 r1

Source: Adapted from Roback (1982).

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 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 - Dusan Paredes 20 / 31
U RBAN H IERARCHY

Figure 8 : City size distribution

Source: Authors.

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 21 / 31
U RBAN H IERARCHY

Figure 9 : Urban tiers

Source: Authors.

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 22 / 31
T HE I NCREMENTAL D ISTANCE

Figure 10 : The incremental distance

Source: Authors.

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 23 / 31
E STIMATION

An approximation estimation for Combes, Duranton Gobillon (2012) is:

r
ÿ k
ÿ h
ÿ
log wi “ α0 ` α1 log popc ` γr ηc ` β k µi,k ` θh D h ` ei (5)
r“1 k“1 h“1

Model 2 incorporates four dummies for the size-based hierarchy of cities previously
defined as tierl :
l
ÿ r
ÿ k
ÿ h
ÿ
log wi “ α0 ` α1 log popc ` δl ` tierl ` γr ηc,r ` β k µi,k ` θh D h ` ei (6)
l“1 r“1 k“1 h“1

Model 3 includes the incremental distance variable (incdist j ).

l
ÿ j
ÿ
log wi “ α0 ` α1 log popc ` δl tierl ` τj incdist j
l“1 j“1
(7)
r
ÿ k
ÿ h
ÿ
`γr ηc.r ` β k µi,k ` θh D h ` ei
r“1 k“1 h“1

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 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 - Dusan Paredes 25 / 31
R ESULTS

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 - Dusan Paredes 26 / 31
R ESULTS
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 ă 0.05, ** p ă 0.01, *** p ă 0.001. Standard error in parentheses.

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 27 / 31
R ESULTS
Figure 11 : City size wage gap and the urban hierarchy effect

City Size Wage Gap

-.05
Percent Difference on Wages Urban Hierarchy Wage Gap
-.1
-.15

Tier 5 Tier 4 Tier 3 Tier 2

Urban Tier

Source: Authors.

Cities, Wages, and the Urban Hierarchy IDEAR-MCR Juan D. Soto - Dusan Paredes 28 / 31
R ESULTS

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 ă 0.05, ** p ă 0.01, *** p ă 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 - Dusan Paredes 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 - Dusan Paredes 30 / 31
C ONCLUSION

§ 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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