A test of agglomeration using wage behavior.

Abstract

The neoclassical economic model of wage behavior over time and place predicts that firms spread out and wages converge, given assumptions such as no transactions costs, homogenous products, and same access to resources and technology. However, there are rents called agglomeration economies that can be extracted in certain occupations and occupational groups simply by being located near other similar firms. In this case, the firms agglomerate and wages diverge. We use data from the Bureau of Labor Statistics to test if agglomeration is happening in certain occupational groups based on whether wages are converging or diverging over the short term. Although agglomeration happens more often in the higher-ordered occupational groups, overall, the evidence is mixed concerning the presence of agglomeration economies.