The rise of external economies in Beijing: Evidence from intra-urban wage variation

Over the past thirty years, labor market and land market liberalization in China has transformed the spatial structure of Chinese cities. This study represents the first attempt to empirically investigate the extent to which firms' location choices in a large Chinese city are influenced by the tradeoff between greater external economies from adjacent employment density, on the one hand, and the higher wage cost due to longer commuting, on the other hand, as predicted by the endogenous urban structure model of Lucas and Rossi-Hansberg [Lucas, R.E. Jr. and Rossi-Hansberg, E., 2002. On the internal structure of cities. Econometrica 70, 1445–1476.]. Employing a large-scale worker survey and job density data from Beijing, we find that locations with higher adjacent job density tend to require longer commuting, and private-sector firms pay a wage premium in these locations. We also find such wage premium to be more significant for skill-intensive firms. These findings reveal the rise of agglomeration economies in Beijing that shapes its urban form evolution.