Beiträge zur Jahrestagung des Vereins für Socialpolitik 2015: Ökonomische Entwicklung - Theorie und Politik - Session: Local Labor Markets 1 C18-V1
Using administrative data for West Germany, we investigate whether part of the urban wage premium stems from fierce competition in thick labour markets. We first document fewer search frictions in denser labour markets. We further show that controlling for search frictions lowers the wage premium from a one standard deviation rise in log population density by 1.3 1.4pp in specifications including worker fixed effects. We lastly find less monopsony power in denser markets. Regional differences in monopsony power predict a wage premium of 1.4 1.9%, thereby accounting for the observed drop in the premium when controlling for labour market frictions.