Estimating Agglomeration Economies with History, Geology, and Worker Effects

Abstract

Does productivity increase with density? We revisit the issue using French wage and TFP data. To deal with the 'endogenous quantity of labour bias (i.e., urban agglomeration is consequence of high local productivity rather than a cause), we take an instrumental variable approach and introduce a new set of geological instruments in addition to standard historical instruments. To deal with the 'endogenous quality of labour bias (i.e., cities attract skilled workers so that the effects of skills and urban agglomeration are confounded), we take a worker fixed-effect approach with wage data. We find modest evidence about the endogenous quantity of labour bias and both sets of instruments give a similar answer. We find that the endogenous quality of labour bias is quantitatively more important. Disciplines Real EstateThis working paper is available at ScholarlyCommons: http://repository.upenn.edu/real-estate_papers/21Estimating agglomeration economies with history, geology, and worker effects Pierre-Philippe Combes * † University of Aix-MarseilleGilles Duranton * ‡ University of TorontoLaurent Gobillon * § Institut National d'Etudes DémographiquesSébastien Roux * Centre de Recherche en Économie et Statistique February 2008ABSTRACT: Does productivity increase with density? We revisit the issue using French wage and TFP data. To deal with the 'endogenous quantity of labour' bias (i.e., urban agglomeration is consequence of high local productivity rather than a cause), we take an instrumental variable approach and introduce a new set of geological instruments in addition to standard historical instruments. To deal with the 'endogenous quality of labour' bias (i.e., cities attract skilled workers so that the effects of skills and urban agglomeration are confounded), we take a worker fixed-effect approach with wage data. We find modest evidence about the endogenous quantity of labour bias and both sets of instruments give a similar answer. We find that the endogenous quality of labour bias is quantitatively more important.

Marshallian labour market pooling: Evidence from Italy

“…The estimates for the density elasticity of output per worker are nonetheless close to the estimates of the density elasticity of tfp in Combes et al (2010). 12…”

“…shown that these historical instruments yield results similar to alternative instruments based on geology (Combes et al, 2010) and are robust to the inclusion of many local characteristics. Of course, the validity of an instrument is always potentially problematic.…”

“…for France (e.g., Combes et al, 2010) and the us (e.g., Ciccone andHall, 1996, Glaeser andResseger, 2010), the estimated elasticity of wages with respect to density is slightly lower. It is about one to two percentage points lower than in these other countries.…”

Agglomeration and job matching among college graduates

“…Perhaps most fundamentally, biases may result if either the workers or job opportunities in large and dense urban areas are systematically more or less conducive to job matching. Indeed, recent research indicates that it is important to account for worker characteristics and composition effects in studies of the effects of urban agglomeration (Combes et al, 2008(Combes et al, , 2010Abel, Dey, and Gabe, 2012). As such, we include a wide array of individual-level characteristics, including choice of college major, and account for differences in the economic structure and performance of metropolitan areas in all of our models.…”

Do governments tax agglomeration rents?

“…Empirical contributions in this area stress the positive role of urbanization and localization economies in determining worker productivity (Henderson (1986), Henderson (2003) and Combes, Duranton, Gobillon, and Roux (2007)), wages (Wheaton and Lewis (2002)) and economic growth (Glaeser, Kallal, Scheinkman, and Shleifer (1992), Henderson, Kuncoro, and Turner (1995)). Incorporating these agglomeration economies in a tax competition model predicts that agglomeration rents dampen the mobility of firms and capital across borders which allows governments to set higher tax rates.…”