The urban wage premium and spatial sorting on observed and unobserved ability

We estimate static and dynamic agglomeration effects on earnings among university graduates using Swedish longitudinal population register data. The prime interest lies with whether and how the dynamic effects of big city work experience vary by observed ability of workers and whether the effects are portable after relocation. Urban wage premium and spatial sorting of university graduates are analysed by using information on school grades, parental education and university rank. We find that the value of accumulated big city work experience increases with observed ability. The dynamic premium of working in bigger cities is not lost when moving to smaller cities, suggesting that it reflects learning effects and human capital accumulation. Our findings indicate systematic spatial sorting on observed indicators of ability as well as on unobserved productive traits. Sorting on unobserved abilities is driven primarily by graduates in the upper part of the observed ability distribution and is apparent also when taking dynamic learning effects into consideration.