City size and wage inequality: The role of firm productivity in changing income dispersion

In the present research project, we investigate the extent to which competition for labour within different industries affects the variation in wage income among those working within these industries and, by extension, how this variation in competition is related to aggregate income inequality. The study is conducted at the Swedish local labour market level, using data from Statistics Sweden (SCB) that in detail describe both local firms and those working within these firms, such as employees’ education and previous work experience, as well as firm-specific productivity.

The project thus aims at bridging a gap that still exists between two largely separate research literatures: one literature that seeks to explain what is called “the urban wage premium,” i.e., the reasons why work in larger cities is often paid better, and the causes of the regional income inequality that arise as a result, and another research literature focusing on wage dispersion and income inequality at the macro level (i.e., within countries).

In the first of these two literatures, the focus of analysis is often on individual workers within larger local labour markets and the potential causes for their higher individual level productivity. Very little attention is here directed towards differences in industry-specific competition for labour between local firms, and its possible consequences for those who are employed within these local firms and industries. In the international research literature on inequality at the macro level, on the other hand, it has been established in recent years that an increased dispersion in average incomes between firms is an important cause of increased inequality at the macro level, but this increased dispersion has not yet been linked to differences in industry-specific competition for labour.

Focusing on local firms and industries, the present project therefore aims at analysing whether the degree of competition for labour constitutes a potential explanation for the well-known positive relationship between larger cities (measured as population size within local labour markets) and higher income inequality within them.