Urban-Rural Labor Markets: A Theoretical Perspective

The present chapter introduces and discusses the mechanisms that drive production decisions within businesses. The chapter begins with an introduction to aggregate production functions and economies of scale. It discusses how production increases more than proportionally with the increase in input factors, leading to decreasing average costs. The concept of agglomeration economies is also introduced, describing the phenomenon where human activities tend to concentrate spatially, as seen in urban environments. Supported by empirical evidence, this phenomenon shows how territorial specificities and local specializations play a fundamental role in the employment and combination of production factors. A revised production function is then introduced, incorporating spillover effects from other regions and sectors. Subsequently, we provided a theoretical framework, discussing how the spatial agglomeration of businesses influences labor market outcomes. The geographical concentration of employers in a specific area reduces the variability associated with the need to relocate in order to find a match with demand. This reduces the risks and costs associated with geographic mobility for workers, allowing them to accept lower wages compared to contexts with fewer (local) job opportunities.