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Agglomeration economies and labour productivity: evidence from longitudinal worker data for GB's travel-to-work areas

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  • Daniel J. Graham
  • Patricia C. Melo

Abstract

This paper analyzes the impact of agglomeration externalities on hourly earnings using longitudinal worker micro-level data from the Annual Survey of Hours and Earnings over the period 2002- 2006. We find that the effect of agglomeration externalities on wages is sensitive to the estimator used. Controlling for nonzero correlation between workers’ unobservable skills and other covariates halves the size of the wage elasticity of agglomeration externalities. On the contrary, accounting for firms’ unobservable heterogeneity has only a weak contribution to the explanation of wage differentials. Another interesting result is that correcting for reverse causality between productivity and agglomeration does not appear to have a substantial impact on the magnitude of the parameter estimates. Our best estimate for the effect of labour market density (market potential) is 0.8% (5.8%). This means that doubling labour market’s employment density can raise hourly earnings by nearly 1%, while halving the distances to other markets produces an increase of hourly wages of nearly 3%. The last piece of evidence refers to the spatial attenuation of agglomeration externalities. We estimate that a 100,000 increase in the number of jobs within 5 kilometres raises hourly wages by approximately 1.19%; the effect falls sharply thereafter.

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File URL: http://eprints.lse.ac.uk/33268/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 33268.

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Length: 52 pages
Date of creation: Oct 2009
Date of revision:
Handle: RePEc:ehl:lserod:33268

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Cited by:
  1. Sabine D'Costa & Henry Overman, 2013. "The urban wage growth premium: evidence from British cities," ERSA conference papers ersa13p516, European Regional Science Association.
  2. Jaume Masip Tresserra, 2013. "Sub-centres and Urban Inequality: A study on Social Equity in the Barcelona Metropolitan Region," ERSA conference papers ersa13p64, European Regional Science Association.
  3. Rosa Sanchis-Guarner, 2012. "Driving Up Wages: The Effects of Road Construction in Great Britain," SERC Discussion Papers 0120, Spatial Economics Research Centre, LSE.
  4. Sabine D'Costa & Henry G. Overman, 2013. "The Urban Wage Growth Premium: Sorting or Learning?," SERC Discussion Papers 0135, Spatial Economics Research Centre, LSE.

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