Firm productivity, wages, and agglomeration externalities

This paper investigates the existence of local externalities in manufacturing. In contrast to many other studies that focus on aggregate employment growth, we examine the effect of externalities occur through both productivity and wage effects, returns to specialisation are strong and large in magnitude. In accordance with the views of Marshall, Arrow and Romer, the net effect of competition have higher revenues and pay lower wages. Competition tends to lower wages, however, probably because of thick labor market externalities. We also find some limited evidence in favour of the diversity argument put forth by Jacobs.