The city wage tax only applies if you work within the city limits. You can live outside the city , in Montgomery, Bucks or Chester Counties, but if you work in the city you are charged the city wage tax.
The city of Philadelphia also taxes its residents on wages, regardless of where those wages were earned. So you could live in the city, work in teh burbs and get hit with the tax. You can live in the burbs and work in the city and get hit with a tax. Current rates as of 7/1/2008:
Residents of Philadelphia 3.98%
Non-Residents of Philadelphia 3.5392%