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Agglomeration Economies and Labour Productivity: Evidence from Longitudinal Worker Data for GBs 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.

Suggested Citation

  • Daniel J. Graham & Patricia C. Melo, 2009. "Agglomeration Economies and Labour Productivity: Evidence from Longitudinal Worker Data for GBs Travel-to-Work Areas," SERC Discussion Papers 0031, Spatial Economics Research Centre, LSE.
  • Handle: RePEc:cep:sercdp:0031
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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. Adelheid Holl, 2014. "Location, accessibility and firm-level productivity in Spain," Chapters,in: Accessibility and Spatial Interaction, chapter 10, pages 195-210 Edward Elgar Publishing.
    3. Ana Maria Bonomi Barufi, 2016. "Should I Stay Or Should I Go? Dynamic Agglomeration Economies In Brazil," Anais do XLIII Encontro Nacional de Economia [Proceedings of the 43rd Brazilian Economics Meeting] 164, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    4. D'Costa, Sabine & Overman, Henry G., 2014. "The urban wage growth premium: Sorting or learning?," Regional Science and Urban Economics, Elsevier, pages 168-179.
    5. Daniel J. Graham & Kurt van Dender, 2009. "Estimating the Agglomeration Benefits of Transport Investments: Some Tests for Stability," OECD/ITF Joint Transport Research Centre Discussion Papers 2009/32, OECD Publishing.
    6. Haddad, Eduardo A. & Hewings, Geoffrey J.D. & Porsse, Alexandre A. & Van Leeuwen, Eveline S. & Vieira, Renato S., 2015. "The underground economy: Tracking the higher-order economic impacts of the São Paulo Subway System," Transportation Research Part A: Policy and Practice, Elsevier, vol. 73(C), pages 18-30.
    7. Rosa Sanchis-Guarner, 2012. "Driving Up Wages: The Effects of Road Construction in Great Britain," SERC Discussion Papers 0120, Spatial Economics Research Centre, LSE.
    8. Daniel Graham & Kurt Dender, 2011. "Estimating the agglomeration benefits of transport investments: some tests for stability," Transportation, Springer, vol. 38(3), pages 409-426, May.
    9. Eduardo A. Haddad & Ana Maria Bonomia Barufi, 2016. "From Rivers to Roads: Spatial Mismatch and Inequality of Opportunity in Urban Labor Markets of a Megacity," Working Papers, Department of Economics 2016_40, University of São Paulo (FEA-USP).
    10. 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.
    11. Anna Matas & José Luís Raymond & José Luís Roig, 2011. "The impact of agglomeration effects and accessibility on wages," Working Papers XREAP2011-16, Xarxa de Referència en Economia Aplicada (XREAP), revised Nov 2011.

    More about this item

    Keywords

    Agglomeration externalities; wages; endogeneity; sorting;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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