DP17678 Does the urban wage premium imply higher firm-level labor shares in cities?
I find that on average, the firm-level labor share increases with local employment density, but this relationship is highly heterogeneous across industries. Through the lens of a theoretical framework featuring a CES production function, I show that this heterogeneity arises because both the density-elasticity of the relative cost of labor (adjusted for productivity) and the elasticity of substitution between capital and labor vary across industries. The magnitude of the effects I find imply that in industries where the density-elasticity of the firm-level labor share is non-null, agglomeration economies are capital-biased. All else equal, industries where the labor share increases with density are less likely to locate in denser areas, especially manufacturing ones.
