The Local Root of Wage Inequality

Wages are on average higher in larger cities, yet the real earnings of low-wage workers are lower. Using French administrative data, I document two novel facts. Large cities concentrate high-paying jobs, while low-paying jobs are everywhere. The reallocation of workers across jobs spurs faster wage growth in larger cities. I propose a framework that rationalizes these facts. Productive employers agglomerate in large cities to maximize their size. Fiercer competition steepens the local ladder, and workers accept lower real earnings anticipating future wage growth. After estimating the model, I find that housing-adjusted unemployment benefits amplify spatial disparities but raise aggregate welfare.