Agglomeration Economies and the Urban Wage Premium in Australia

Abstract

Understanding the benefits of dense agglomerations is important for decisions on where to live and for our understanding of deep economic disadvantage. This paper is the first to quantify the economic impact of urban density on individual wages, referred to as the urban wage premium, in Australia. By combining Household Income and Labour Dynamics in Australia Survey microdata on 13,112 employed individuals and regional-level population data, population density effects on individual hourly wages are studied over the period 2001 to 2019. A unique feature of this paper is to apply a flow-based clustering algorithm that uses commuting flows to define spatial structures, which are compared with the Australian Statistical Geography Standard spatial structures. The Ordinary Least Squares estimate of the urban wage premium peaks at 2.7 per cent. Controlling for individual fixed effects, the estimate peaks at 1.6 per cent. This evidence suggests that wages increase by 1.6 to 2.7 per cent if local density doubles.