Title: Why Do Agglomeration Economies Not Raise Employment?
Reference Number: 1030
Publication Date: November 2001
JEL Classifcation: E24, J23, J64

Chung Yi Tse
The University of Hong Kong

There is ample evidence that the agglomeration of economic activities raises productivity. The available evidence, however, suggests that agglomeration economies do not appear to extend to helping raise employment in cities above less dense locales. But in the absence of other effects, standard economic reasoning suggests that more productive workers should also experience higher employment. This paper explains that the outward shift in the production function by improving investment incentives would also induce firms to create more specialized jobs. The specialized jobs are harder to fill and hence employment needs not go up, despite the increase in productivity.

Key words: job search and matching, agglomeration economies, unemployment

Last modified: 07/25/2002