Ability Sorting and Consumer City

This paper proposes a consumption-side explanation for the urban wage premium. The key claim is that the wide consumption variety in large cities is a luxury good that is more important to high-skill workers, and thus the higher average wages in large cities are due to the selection of high skill workers choosing to live there. A unique implication is that urban wage premiums are decreasing in skills and can even be negative for very high-skill workers. I con…rm this implication using data on the health care workers. Address: Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC, Canada V6T 1Z2; E-mail: [email protected]. I am indebted to Thomas Holmes for his guidance and patience. I also thank two anonymous referees, James Schmitz, Samuel Kortum, Andrea Moro, Robert Town, Edward Glaeser, Bob Helsley, Hwikwon Ham, Mark Gibson, and seminar participants at University of Minnesota, University of British Columbia, University of Rochester, NBER, FRB Minneapolis, FRB Boston, and Econometric Society World Congress 2005 for valuable suggestions and discussions. All remaining errors are mine.