Effects of Agglomeration on Labor Productivity : Empirical Cross-country Evidence from the Nordics
The main thesis of economies of agglomeration is that by increasing the density of employment, economic benefits will follow. In this research, this hypothesis is tested in the context of the Nordic countries by studying if the increases in the employment density affect the regional productivity. This effect between the employment density and regional productivity is called the agglomeration effect. The theoretical background of this effect lies in three fundamental concepts: economies of scale, labor pooling and knowledge spillovers. Cities have their origins in the economies of scale and ag- glomerations of people they comprise of form a fertile base for effective matching between employers and employees. The denser these production centers are populated, the easier it is for the spillovers of innovation and ideas to happen. This study uses a linear ordinary least squares (OLS) model to estimate this effect. The data consists of 70 regional observations and the model comprises of employment density as the explanatory variable, varying number of education level control variables and dummy variables for different countries. Endogeneity of the explanatory variable is also assessed but as the proposed instrument, the total land area of the included regions, proves to be invalid for this particular geographic region, the OLS estimates will serve as the final results. In the previous studies conducted in Europe and in the USA, the magnitude of the agglomeration effect has been found to be between 4.4 and 6 %. This study’s estimates tell the effect to be between 2.1 and 2.9 % in the Nordic countries that is lower than the corresponding values for the aforementioned regions. This result is discussed to stem from the unique geographical and political characteristics of the Nordic regions.
Agglomeration, Population density, Productivity, Nordic countries
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