Working Paper: CEPR ID: DP6728
Authors: Pierre-Philippe Combes; Gilles Duranton; Laurent Gobillon; Sébastien Roux
Abstract: Does productivity increase with density? We revisit the issue using French wage and TFP data. To deal with the ?endogenous quantity of labour? bias (i.e., urban agglomeration is consequence of high local productivity rather than a cause), we take an instrumental variable approach and introduce a new set of geological instruments in addition to standard historical instruments. To deal with the ?endogenous quality of labour? bias (i.e., cities attract skilled workers so that the effects of skills and urban agglomeration are confounded), we take a worker fixed-effect approach with wage data. We find modest evidence about the endogenous quantity of labour bias and both sets of instruments give a similar answer. We find that the endogenous quality of labour bias is quantitatively more important.
Keywords: Agglomeration economies; Instrumental variables; TFP; Wages
JEL Codes: R12; R23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| historical population density data (J11) | current employment density (J69) |
| current employment density (J69) | wages (J31) |
| endogenous quantity of labor bias (J79) | elasticity estimate (C51) |
| endogenous quality of labor bias (J24) | elasticity estimate (C51) |
| soil characteristics (Q24) | current population distribution (J11) |
| sorting of workers into denser areas (R23) | observed relationship between density and productivity (O44) |