wage premiums net of skill sorting for 16 countries in the Latin America and the Caribbean region. While two of the countries in our sample - Brazil and Colombia - have already been considered by Chauvin et al. (2017) and Duranton (2016) respectively - the remaining 14 countries have not, to our knowledge, been previously analyzed in the literature. We generate these estimates using a harmonized data set which contains information on both the nominal wages and characteristics of individual workers, and of the characteristics of the locations in which the workers live. The scale of our analysis with harmonized data is also a novel contribution. Furthermore, we test how the city premiums are related to variables that represent different theories of urban success: agglomeration economies, human capital externalities, and market access.

Variation in productivity premiums is largely explained by sorting on observable worker characteristics, including observed variation in skill levels. Once this sorting is taken into account, much of the variation in nominal wages across locations disappears. Nevertheless, some variation does remain and this variation is correlated with city characteristics. When the data from all 16 countries are pooled, a location’s underlying productivity level, as captured by its city premium, shows a strong positive correlation with average human capital, suggesting the presence of human capital externalities. It also exhibits a positive correlation with market access. Agglomeration economies (measured through population density) disappear when human capital externalities and market access are introduced. There is some heterogeneity across countries and groups of populations that is also analyzed, but the strength of human capital externalities compared to the other factors is robust.

In summary, urban success in LAC is crucially dependent on both the existence of a strong overall stock of human capital and, at least for certain countries, good access to large consumer and supplier markets through transportation networks. In contrast, agglomeration economies, in their more traditional sense, seem to be relatively weak across much of the region, which may be related to a lack of infrastructure investment and poor city management, relative to the high levels of urban population density that prevail in the region.

Heterogeneity across countries is investigated. It remains true, across most countries, that agglomeration economies, when measured linearly, lose in a horse race with market access and human capital externalities. In particular, the association of productivity and human capital at the municipality level is heterogeneous, which could be a reflection of country differences in educational quality.

This paper responds to an interest in studying agglomeration effects in developing countries empirically. More than just extending the state of knowledge on the extensive margin, this paper studies relationships in developing countries that could be significantly different from the ones found in the literature for developed areas, where, for example, congestion costs could play a weaker role due to better infrastructure and institutions.

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