Economic effects of the spatially uneven distribution of workers as well as firms

Background and Objective

In Germany the economic activity is highly uneven distributed across space. At the same time, there exist pronounced regional disparities with regard to economic indicators. Especially rural regions are often characterised by a regional wage level that is below the national average and relatively low innovation rates.

 This project aims at providing new insights with regard to the reasons for the differences between rural and urbanised regions with regard to economic power by analysing the impact of the spatially uneven distribution of economic activity on workers and firms and the underlying mechanisms. Of particular interest is its impact on labour productivity and the generation of innovations.

Approach

Based on secondary data from the Institute for Employment Research (IAB), we analyse whether wages and innovation rates of firms are affected by characteristics of the local labour market applying micro econometric estimation techniques. Of particular interest is the importance of the size of the local labour market and of the locally available amount of high-skilled labour.

Data and Methods

We make use of micro-data from the Institute for Employment Research (IAB), in particular of the Integrated Employment Biographies (IEB) and the IAB Establishment Panel, with detailed information on individual employment relationships, workers, and firms. These data is merged with information referring to the regional level like characteristics of the local labour market.

Our Research Questions

• How important is the size of the local labour market for the regional productivity and wage level and what are the underlying mechanisms?
• To which extent does the success of firms with regard to the generation of innovations depend on the regional context, in particular on the proximity to other firms and on the local availability of high-skilled labour?

Preliminary Results

So far, our analyses show that the density of local labour markets in Germany impacts on the wage of new employment relationships. The results suggest that doubling employment density in the region, in which new employment is taken-up, increases the wage of new employment relationships by 1.0–2.6 percent. However, these benefits seem to accrue only to persons experiencing job-to-job transitions and the short-term unemployed, but not to the long-term unemployed. It is supposed these differences point to matching advantages in large urban labour markets from which only some job seekers benefit. Furthermore, we provide new empirical evidence for the magnitude of dynamic agglomeration economies. They imply that wages in rural areas grow more slowly than wages in highly agglomerated labour markets, which is often related to learning externalities in big cities. However, the results indicate that not only the sheer size of regional labour markets determine individual knowledge accumulation. Benefits from acquiring experience in large labour markets by workers in service sector occupations are partly caused by human capital externalities, whereas manufacturing workers experience additional dynamic gains from localisation economies, in Germany particularly outside urban centres.

As regards differences in firm innovation rates between urban and rural regions, we provide new evidence that a large portion of these disparities is due to firm characteristics.

Links and Downloads

Project at the IAB: www.iab.de/138/section.aspx/Projektdetails/k161012304