Cities are ultimately nothing more than proximity, so the returns to urban concentration can be seen as reductions in transport costs.
...a complete urban model has at least three key area-level dependent variables: wages, population levels and housing prices. These three variables are determined by three equilibrium conditions. First, workers must be indifferent across space. This ensures that real wages, corrected for local price and amenity levels, must be equalized across metropolitan areas. Second, firms must be in equilibrium, which means that wages equal the marginal productivity of labor. Third, the housing market must be in equilibrium, which requires housing prices to equal the costs of providing housing, at least in growing markets.
...the spatial equilibrium model allows us to easily reject the view that consumer amenities are the primary force driving urban concentration in the U.S. If cities were driven by amenities, then real wages should be lower in big urban areas, and this is not the case. The real wage premium associated with living in big cities has declined over time (Glaeser and Gottlieb, 2006) which suggests that cities have become relatively more pleasant places to live, perhaps because of the decline in crime (Schwartz, Susin and Voicu, 2003). Yet even today, however, people require a mild wage premium to locate in big urban areas.
What is the relevant margin?
Is it living in Washington, D.C. vs. living in a nearby suburb? Or is it living the greater D.C. metro area (including the suburbs) or living somewhere remote? In my case, you would have to pay me a wage premium to get me to move into the District. However, you would have to pay me a tremendous wage premium to get me to move to, say, Hagerstown.
Of course, I am not a migrant, which suggests that I am inframarginal. I enjoy consumers' surplus living where I am, and my marginal preferences are not observable in the data on my wage or my house price.
It would appear that if G&G are correct, then Richard Florida is not. In Florida's model, a city needs certain amenities in order to draw "the creative class." However, the G&G analysis would say that, when indicators of skills are controlled for, wages are still higher in large urban areas. This suggests that , all else equal, even the "creative class" would prefer to live elsewhere. Of course, Florida could still be correct in terms of comparative advantage. That is, for two locations of equal population density, the one with the more "hip" amenities will be the one where the "creative class" demands a smaller waqe premium.
Stevenson and Wolfers argue that marriage was once based on production complementarity, and now it tends to be based on consumption complementarity. My impression, contra G&G, is that a similar trend is taking place in cities. I was just in Tucson, and that is a good city for someone who likes biking and/or live rock concerts. It does not seem so good for someone who likes ethnic dining and movies. I suspect that people who choose Tucson (or other cities) do so more because of what they can consume there than because of what they can produce there.
There are some amenities where the minimum scale of a city is likely to be high (professional sports teams). Scale may also be an advantage in terms of subtle consumption complementarities: if the people who supply A like to consume B, the people who consume B like to consume C, and so on, then the equilibrium is for everyone to flock to a large city.
People may choose to live in New York City because they have expensive tastes, and that may in turn lead them to strive for high salaries. People who choose remote areas, on the other hand, may be happier earning lower wages and consuming more in the form of leisure or inexpensive pleasures. Again, I find myself wondering what is the relevant margin and whose preferences end up being represented in market prices.
Perhaps someone ought to apply the G&G analysis to higher education. Does the phrase "ultimately nothing more than proximity" not describe colleges and universities?