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

The analyses carried out so far show that the density of the regional labor market has a positive influence on the wage that a worker receives when taking up a new job. Our analyses suggest that a labor market density higher by a factor of 2 in the region where employment is taken up would be associated with a 1.0-2.6 percent higher starting wage. However, this so-called static urbanization advantage only seems to benefit people who were unemployed for at most a short time before taking up employment. One explanation for this are matching advantages in highly dense labor markets, which decrease with the duration of individual unemployment. Furthermore, the evaluations carried out so far in the project also provide evidence for dynamic agglomeration advantages: According to the results, labor market density has a positive influence on individual wage growth, ceteris paribus. This means that wages in rural areas rise more slowly over the course of an individual's working life than in agglomerations. In the literature, this is typically attributed to learning advantages in highly dense labor markets.

The faster wage growth in metropolitan areas is particularly noticeable among employees working in (knowledge-intensive) services. Proximity to (other) highly qualified specialists also appears to play an important role here. For workers in the manufacturing industry, on the other hand, we also observe above-average individual wage growth in regions with a pronounced specialization in the manufacturing industry, all other things being equal. In Germany, such regions are often located in (rather) rural areas. In addition to the previous findings, our latest work indicates that the slower growth of individual wages in rural areas is partly related to the activities, firms and sectors in which workers gain their work experience. In rural regions, these are more often small establishments, routine tasks and non-knowledge-intensive sectors than in metropolitan areas. Such jobs presumably offer comparatively few opportunities to acquire new knowledge and learn new skills that increase productivity and result in wage growth.

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