Chapter

Estimating Agglomeration Economies with History, Geology, and Worker Effects

Edited by Pierre-Philippe Combes, Gilles Duranton, Laurent Gobillon and Sébastien Roux

in Agglomeration Economics

Published by University of Chicago Press

Published in print April 2010 | ISBN: 9780226297897
Published online February 2013 | e-ISBN: 9780226297927 | DOI: http://dx.doi.org/10.7208/chicago/9780226297927.003.0002
Estimating Agglomeration Economies with History, Geology, and Worker Effects

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This chapter addresses the issues of endogenous quantity and endogenous quality of labor, provides a simple model of productivity and wages in cities, and discusses the two main estimation issues. It presents the wage data and the worker-fixed approach to the endogenous quality of labor bias. Cities attract skilled workers so that the effects of skills and urban agglomeration are confounded. Urban agglomeration is a consequence of high local productivity rather than a cause. An instrumental variable approach introduces a new set of geological instruments in addition to standard historical instruments. Furthermore, the chapter shows the results for wages and productivity. Long lags of endogenous explanatory variables make for strong instruments, and geological characteristics are more complicated instruments to play with. The simultaneity problem between employment density and local wages/productivity is relatively small. Better workers are located in more productive areas. This sorting of workers by skills (observed and unobserved) is quantitatively more important than the endogenous quantity of labor bias. The future work would develop more sophisticated approaches to deal with the sorting of workers across places.

Keywords: endogenous quantity; labor; urban agglomeration; employment density; historical instruments; geological characteristics

Chapter.  19742 words.  Illustrated.

Subjects: Microeconomics

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