Agglomeration Economies and Firm Level Labor Misallocation

A large portion of productivity differentials among locations is related to density. Firms located in denser areas are more productive due to agglomeration economies (Combes et al., 2012a). We provide in this paper an explanation of such economies: lower input misallocation. The distribution of resources among heterogeneous fi rms has relevant consequences on allocative effi ciency and denser areas provide a more favorable environment for dynamic matching between employers and employees. Using a methodology proposed by Petrin and Sivadasan (2013) we are able to assess the degree of resource misallocation among fi rms within sectors for each of the 96 French “Départements” and 347 Employment Areas (commuting zones). Based on fi rm-level productivity estimates, we identify in the gap between the value of the marginal product and marginal input price the degree of inputs allocation at the fi rm level. Over the period 1993-2007 the average gap at fi rm level is around 9 thousands euro, showing a relevant increase starting from the early 2000s. Importantly, fi rms’ misallocations are lower in denser areas, suggesting that the matching mechanism is playing a role in explaining the productivity premium of agglomerated locations.