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Cities, Matching and the Productivity Gains of Agglomeration

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  • Fredrik Andersson
  • Simon Burgess
  • Julia Lane

Abstract

The striking geographical concentration of economic activities suggests that there are substantial benefits toagglomeration. However, the nature of those benefits remains unclear. In this paper we take advantage of a newdataset to quantify the role of one of the main contenders - the matching of workers and jobs. Using individuallevel data for two large US states we show that thicker urban labour markets are associated with moreassortative matching between workers and firms. Another critical condition is required for this to generatehigher productivity: complementarity of worker and firm quality in the production function. Usingestablishment level productivity regressions, we show that such complementarity is found in our data. Puttingtogether the production and matching relationships, we show that production complementarity and assortativematching is an important source of the urban productivity premium.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0648.

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Date of creation: Sep 2004
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Handle: RePEc:cep:cepdps:dp0648

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: Urban Productivity; Matching; Agglomeration;

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  1. John M. Abowd & Francis Kramarz & David N. Margolis, 1994. "High Wage Workers and High Wage Firms," NBER Working Papers 4917, National Bureau of Economic Research, Inc.
  2. Fredrik Andersson & Harry J. Holzer & Julia I. Lane, 2002. "The interactions of workers and firms in the low-wage labor market," Longitudinal Employer-Household Dynamics Technical Papers 2002-12, Center for Economic Studies, U.S. Census Bureau.
  3. Barbara Petrongolo & Christopher Pissarides, 2006. "Scale Effects in Markets with Search," Economic Journal, Royal Economic Society, vol. 116(508), pages 21-44, 01.
  4. Duranton, Gilles & Puga, Diego, 2003. "Microfoundations of Urban Agglomeration Economies," CEPR Discussion Papers 4062, C.E.P.R. Discussion Papers.
  5. Lucia Foster & John C. Haltiwanger & C. J. Krizan, 2001. "Aggregate Productivity Growth. Lessons from Microeconomic Evidence," NBER Chapters, in: New Developments in Productivity Analysis, pages 303-372 National Bureau of Economic Research, Inc.
  6. Michael Kremer & Eric Maskin, 1996. "Wage Inequality and Segregation," Harvard Institute of Economic Research Working Papers 1777, Harvard - Institute of Economic Research.
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  8. Pieter A. Gautier & Coen N. Teulings, 2003. "An Empirical Index for Labor Market Density," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 901-908, November.
  9. Wheeler, Christopher H, 2001. "Search, Sorting, and Urban Agglomeration," Journal of Labor Economics, University of Chicago Press, vol. 19(4), pages 879-99, October.
  10. Moretti, Enrico, 2004. "Human capital externalities in cities," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 51, pages 2243-2291 Elsevier.
  11. Julia I. Lane & John C. Haltiwanger & James Spletzer, 1999. "Productivity Differences across Employers: The Roles of Employer Size, Age, and Human Capital," American Economic Review, American Economic Association, vol. 89(2), pages 94-98, May.
  12. Shimer, R. & Smith, L., 1997. "Assortative Matching and Search," Working papers 97-2b, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Michael Kremer & Eric Maskin, 1996. "Wage Inequality and Segregation by Skill," NBER Working Papers 5718, National Bureau of Economic Research, Inc.
  14. Burdett, Kenneth & Coles, Melvyn G, 1999. "Long-Term Partnership Formation: Marriage and Employment," Economic Journal, Royal Economic Society, vol. 109(456), pages F307-34, June.
  15. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 813-46, July-Aug..
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