Labor Market Density and Increasing Returns to Scale: How Strong is the Evidence?

33 Pages Posted: 10 Mar 2011 Last revised: 17 Mar 2011

Yu-Chin Chen

University of Washington - Department of Economics

Noah Weisberger

Social Science Research Network (SSRN) - Former SSRN Contractors

Edwin Wong

University of Washington - Department of Economics

Date Written: February 25, 2011

Abstract

Models of economic geography posit that the density of economic activity has two effects that oppose each other in equilibrium: decreasing returns to productive activities due to congestion effects and increasing returns that result from information spillovers and local demand externalities. In an influential paper, Ciccone and Hall (1996) looked at the effect 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 returns/agglomeration effect dominates. We extend their analysis and re-examine the relationship between density and productivity across industries and over both states and time. Through careful identification of the source and nature of productivity shocks, we show that the evidence for agglomeration effects is indeed quite robust, even within industries, providing evidence for the presence of Marshallian externalities. As for the balance of agglomeration and congestion effects found in previous literature, what we call "net increasing returns to scale", the evidence is much weaker.

Keywords: geographic density, labor productivity, increasing returns to scale

JEL Classification: R12, O4

Suggested Citation

Chen, Yu-Chin and Weisberger, Noah and Wong, Edwin, Labor Market Density and Increasing Returns to Scale: How Strong is the Evidence? (February 25, 2011). Available at SSRN: https://ssrn.com/abstract=1782250 or http://dx.doi.org/10.2139/ssrn.1782250

Yu-Chin Chen (Contact Author)

University of Washington - Department of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States
206-543-6197 (Phone)

HOME PAGE: http://faculty.washington.edu/yuchin

Noah Weisberger

Social Science Research Network (SSRN) - Former SSRN Contractors ( email )

Edwin Wong

University of Washington - Department of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States

Paper statistics

Downloads
61
Rank
293,291
Abstract Views
775