Meekes, J. (2021). ‘Agglomeration Economies and the Urban Wage Premium in Australia’, Life Course Centre Working Paper Series, 2021-18. Institute for Social Science Research, The University of Queensland.
This study is the first to quantify the economic impact of urban density on individual wages in Australia. The international literature shows a positive urban density effect on wages, referred to as the urban wage premium. This result is explained by agglomeration mechanisms that affect the benefits and costs of the spatial concentration of economic activity. The benefits of density lead to improved matching of employers to employees, better sharing of resources and risk among companies; and improved learning of knowledge by employees. The costs of density include crowding and frictions such as increased congestion in urban areas. This paper contributes to the literature by analysing the urban wage premium in Australia, a country which has a wide range of urban areas of different sizes that are spatially separate from one another.
Ultimately, the size and net effect of agglomeration is an empirical question. Individual microdata are used from the longitudinal survey: Household Income and Labour Dynamics in Australia Survey 2001-2019. The paper assesses costs and benefits of agglomeration by estimating the impact of population relative to spatial area size on individual wages. It also uses commuting flows to define spatial aggregation to estimate the urban wage premium. This methodology enables a comparison of the urban wage premium across different spatial scales, including Statistical Area Level 2 and Local Government Area. This is a novel methodology for studying the significance of place for socio-economic disadvantage.
It was found that the Ordinary Least Squares estimate of the urban wage premium peaks at 2.7 per cent, whereas the estimate peaks at 1.6 per cent after controlling for individual fixed effects. This evidence suggests that wages increase by 1.6 to 2.7 per cent if the population density doubles: in other words, density has a significant positive impact on wages. This paper adds to our understanding of the costs and benefits of density and the variables that enable workforce participation and employment outcomes. The paper provides a strong baseline from which to consider changes underway in the COVID-19 era where hybrid models of office and home-based employment are becoming more widespread. The winners and losers of the changing geographies of work will have implications for socio-economic advantage and disadvantage.