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Abstract

I estimate the city size earnings elasticity for Germany, accounting for possible selection of more productive workers into bigger labor markets. The short-run elasticity for Germany suggests that a worker moving from rural areas to medium sized cities can expect his earnings to increase by 6.1 percent on impact. In the long run, workers’ earnings in bigger cities increase by even more, due to exposure effects: work experience gained in bigger cities increases earnings by more than the kind earned in smaller cities. For instance, working 30 years in medium sized cities, as opposed to the rural areas of Germany, adds an extra 3.1 percent to earnings. To better understand the result, I decompose the differences into the sources of earnings growth: growth through job mobility and on the job. I find that workers in bigger labor markets experience fewer earnings losses when going through unemployment, but also fewer gains on-the-job. Further, the Job-Unemployment-Job rate is lower in bigger cities and Job-Job changes are similar in frequency and earnings change conditional on mobility. Taken together, I interpret the findings as evidence for thick labor market effects leading to lower unemployment risk for workers. Learning mechanisms, as sources for agglomeration economies, are likely less relevant due to the lower on-the-job earnings gains in bigger cities.

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