noah - Labor Market Density and Increasing Returns to Scale...

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Labor Market Density and Increasing Returns to Scale: How Strong is the Evidence? Yu-chin Chen Noah Weisberger Edwin Wong February 2011 Abstract. Models of economic geography posit that the density of economic activity has two e/ects that oppose each other in equilibrium: decreasing returns to productive activities due to congestion e/ects and increasing returns that result from information spillovers and local demand externalities. In an in±uential paper, Ciccone and Hall (1996) looked at the e/ect of county level labor market concentration on per-worker Gross State Product in a cross section of US States, and observed that on net, the increasing returns²agglomeration e/ect dominates. We extend their analysis and re-examine the relationship between density and productivity across industries and over both states and time. Through careful identi³cation of the source and nature of productivity shocks, we show that the evidence for agglomeration e/ects is indeed quite robust, even within industries, providing evidence for the presence of Marshallian externalities. As for the balance of agglomeration and congestion e/ects found in previous literature, what we call ´net increasing returns to scale", the evidence is much weaker. J.E.L. Codes: R12, O4 Key words: geographic density; labor productivity; increasing returns to scale Acknowledgements. We thank Christopher L. Foote for his guidance and provision of data. We are also grateful to Gordon Hanson for sharing his county-reclassi³cation codes and John C. Williams, Yannis M. Ioannides and the two anonymous referees for their helpful comments on earlier drafts of this paper. Feedback from participants at the Harvard University macroeconomics workshop are also acknowledged. Bisundev Mahato and Tripti Thapa provided excellent research assistance. All errors, however, are our own.
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1 control for geographic concentration due to the supply of exogenous site-speci±c resources.² Ellison and Glaeser (Journal of Political Economy, 1997) 1 Introduction Theoretical models of economic geography posit that the geographic concentration of eco- nomic activity has two e/ects that oppose each other in equilibrium: decreasing returns to productive activities due to congestion e/ects and increasing returns that result from information spillovers and local demand externalities. 1 This paper explores how spatial agglomeration of production at the local level in³uences aggregate labor productivity of the region. The heterogeneity across US states, in terms of labor productivity and the density of economic activity, allows us to test for the presence of increasing returns to scale that may exists across US states and over time. Using the density of economic activity as our measure of geographic concentration, we speci±cally examine the existence and strength of spatial agglomeration e/ects in production both at the aggregate and industry level. A com-
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This note was uploaded on 02/12/2012 for the course ECON 1123 taught by Professor Giacomini during the Spring '08 term at Harvard.

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noah - Labor Market Density and Increasing Returns to Scale...

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