Agglomeration economies: the heterogeneous contribution of human capital and value chains

Authors: Dario Diodato*, Harvard Kennedy School, Frank Neffke, Harvard Kennedy School, Neave O'Clery, Oxford University
Topics: Economic Geography
Keywords: Coagglomeration, Marshallian externalities, labor pooling, value chains, manufacturing, services, regional diversi fication
Session Type: Paper
Day: 4/11/2018
Start / End Time: 1:20 PM / 3:00 PM
Room: Regent, Marriott, River Tower Elevators, 4th Floor
Presentation File: No File Uploaded

In spite of congestion, elevated factor costs and the risk that trade secrets leak to competitors, firms of the same industry frequently locate close to each other. This agglomeration of firms is often attributed to Marshallian externalities, which are believed to push towards agglomeration with different intensity for different industries, leading some to concentrate in few locations while others to spread more evenly across cities and regions. Yet, the differential impact of agglomeration externalities for individual sectors of the economy is still poorly understood.
We document the heterogeneity across sectors in the impact labor and input-output links have on industry agglomeration. Exploiting the available degrees of freedom in coagglomeration patterns, we estimate the industry-specific benefits of sharing labor needs and supply links with local firms. On aggregate, coagglomeration patterns of services are at least as strongly driven by input-output linkages as those of manufacturing, whereas labor linkages are much more potent drivers of coagglomeration in services than in manufacturing. We further observe that, even within service and manufacturing, the Marshallian forces are heterogeneous in pushing towards agglomeration.
In addition, we find that the degree to which labor and input-output linkages are reflected in an industry’s coagglomeration patterns is relevant for predicting patterns of city-industry employment growth. We show not only that related employment employment (by input-output or labor) predicts city-industry growth, but also that the effect is stronger for industries that we estimate being more sensitive to the Marshallian forces.

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