Endogenous local labour markets, regional aggregation and agglomeration economies

We examine the role of spatial unit size in measuring the urban wage premium. Using Dutch administrative data, we define local labour markets (LLMs) based on employees’ commuting outcomes, gender and educational attainment. We show that high-educated employees and male employees have a relatively large LLM. Using a continuum of regional aggregations, we find that urban wage premium estimates increase over the level of aggregation, also for different subgroups of employees. We show that the modifiable areal unit problem (MAUP) does not explain this pattern, consistent with stronger agglomeration externalities at higher regional aggregation levels.