The answer to the puzzle is that workers in cities in table 1—together with their counterparts in other countries—are more productive. Employers are willing to pay higher wages because they get more in return for each hour worked. If workers were not more productive, firms in the traded sector would in the long run relocate away from high-cost locations.

This higher labor productivity does not reflect better endowments of natural resources. After all, there is no silicon in Bangalore or Silicon Valley. Nor is there oil in Shanghai. The higher labor productivity is due mostly to three important competitive advantages, which economists refer to collectively as the forces of agglomeration: thick labor, thick markets for specialized service providers, and knowledge spillovers.

**_Thick labor._** A major advantage of cities for workers and firms is that urban labor markets are thicker. Economists have long understood that thick markets—those with many sellers and many buyers—are particularly attractive because they make it easier to match demand with supply. This matters more for highly skilled workers than unskilled ones, and it is a key reason for the existence of industrial clusters. If you are a software engineer specializing in a particular type of software design, it is really important to find the one biotech firm that uses that specific technology. If you move to a city like Bangalore, where many software firms are concentrated, you are more likely to find the firm that really wants—and will pay for—your unique skill set. If you move to a city like Calcutta, with fewer software firms, you might have to settle for a less ideal match and thus a lower salary. You will have a vastly different career trajectory depending on where you move. The advantages of a better match also accrue to employers. By locating in Bangalore, a software startup enjoys higher productivity and produces more patents, because it can find exactly the kind of molecular biologist that fits its needs. A thick market appears to be a win-win for workers and firms alike.

For workers in professional occupations, the economic return of being in a thick labor market, as measured by increased earnings, has been rising for the past 30 years. In the United States, the average wage in labor markets with more than a million workers is a third higher than the average wage in those with 250,000 or fewer. This remains true even after worker seniority, occupation, and demographics are held constant. Remarkably, this difference is now 50 percent larger than it was in the 1970s. Market size is especially important for workers with highly specialized skills, such as high-tech engineers, scientists, mathematicians, designers, and doctors. Among doctors, specialists in large cities perform a narrower set of activities than those in small ones.<sup>5</sup> But market size does not matter very much for unskilled workers; manual laborers and carpenters perform similar tasks in large cities and small.

The size of labor markets also affects how frequently people change jobs. One study that followed 12,000 workers over a 20-year period revealed that early in a career, when a worker is shopping around for a good match, she will change jobs more often in a large, diverse local market than in a smaller, specialized one. Later in a career, however, when stability presumably 6