Project number: FK142941

Over the last few decades the importance of cognitive and social skills to individual earnings and other labor market outcomes has been established by a large number of studies spanning various countries. Recent studies have also shown that these skills are rewarded more in cities, but it is still unclear what mechanisms are responsible for this widely observed phenomena. Some scholars link these findings to the mechanisms that facilitate the spatial concentration of economic activities, while others argue that cognitive and social skills are rewarded in urban labour markets due to the relatively higher demand for these skills. In this project we focus on two potential mechanisms that may explain why these skills are rewarded more in thick urban labour markets: assortative matching through which workers are assigned to jobs and market competition in the service sector of cities that drives up the local demand for certain skill types. By analyzing Hungarian linked administrative data, a unique survey data on the skill requirements of Hungarian employers and a novel EU-wide database of job advertisements, we seek to estimate the extent to which the urban cognitive and social skill premium is explained by the quality of matching between employers and employees and local market competition in the non-traded sector.