HETEROGENEITY OF LABOR-MARKETS AND CITY SIZE IN AN OPEN SPATIAL ECONOMY

This paper presents a model of city size determination in an open spatial economy. It argues that the city size is determined by two interacting forces. First, holding other things constant, the wage rate increases with the size of the city, because the larger the city, the better the match between the diverse job requirements and the diverse labor pool. The higher wage of a city will in turn attract more workers from its hinterland. However, the growth of the city will be limited by the physical consequence of the concentration of economic activities. Since the city has to accomodate more people, the rent and the density of the city will rise. Holding wage level constant, the higher price of land will decrease the welfare of the city resident. The size of the city will be determined where the higher wage the worker recives in the city is exactly compensated by the higher rent he has to pay so that he gets the same level of utility as a worker elsewhere. © 1991.