When a worker considers relocating, whether within their own country or abroad, one of the factors that weighs most heavily on the decision is pay. People want to leave the place they live in to improve their living conditions and secure a better income.
Comparing salaries
As The Economist points out, workers looking for better pay usually start by comparing average salaries. That data depends on two different forces.
One city can attract specialized professionals who would earn a lot wherever they lived. Another can raise pay for almost everyone, which happens through the kind of clustering that boosts productivity. For The Economist, a future migrant should be aiming for that second type of city.
Gaurav Chiplunkar and his colleagues at the University of California, San Diego studied the work history of more than 500 million people using LinkedIn’s career platform. Their goal was to untangle the effect of two variables on pay: place and person. To do this, they tracked office workers as they moved between cities, to explain how pay depends on where someone works.
300 cities
Studying more than 300 cities, under what they call “location premiums,” the American researchers found that where someone works accounts for 45% to 73% of the pay gap between cities within a given country. The rest comes down to the individual.
“Location premiums” could also be described as the added value that comes simply from being in a particular place.
When it comes to moving abroad, and after adjusting for purchasing power and inflation, location accounts for 93% of that gap.
One example is Vaduz, the capital of Liechtenstein. Pay there is genuinely very good, even though living in a town of about 6,000 people, in a country covering just 160.5 square kilometers, might put off some potential migrants. Cities with high location premiums for good pay tend to be large, densely populated, and industrially diverse, with plenty of job opportunities, such as San Francisco and New York.
In wealthy countries, cities with big location premiums tend to also be the ones with the highest average salaries, so workers chasing pay end up in economically productive places.
When it pays to choose the “periphery”
In poorer countries, this works differently. Take India. When Indians flock to big, high-paying cities like Bangalore, many end up with only small pay premiums. The biggest salary gains are actually found in the smaller cities surrounding places like Bangalore. Why? Because people there enjoy the benefits of income clustering without suffering from housing shortages, power cuts, and traffic congestion.
Something similar applies to companies operating in richer versus poorer countries. In America, the most productive companies, the ones that can offer pay raises, are able to grow and hire more workers. In lower-income countries, companies often run into the same obstacles as workers do. That means employment shifts toward less productive companies that hire more people but pay them less.
Pay and economic growth
The study’s authors calculate that if India’s most productive cities could employ the same share of workers as those in America, average wages across the country would rise by 2.3%.
They also found that if the same share of workers were employed by the most productive companies, total earnings would rise by 4.3%. Similar shifts, they estimate, would raise pay by 5% in Mexico and 8% in Nigeria.
The issue is that workers often can’t tell why the city they’re moving to offers higher pay, whether it’s due to productivity, or simply because talented, specialized people already live and work there.
But as The Economist notes, if workers were given help finding the right places to go, economic growth would benefit too.
