Published: November 29, 2019

A new Life Course Centre Working Paper examines the size of workers’ Local Labour Markets to analyse the impact of employment density on wages, often referred to as the urban wage premium, and other socio-economic measures.

Local Labour Markets (LLMs) are used by economists and policymakers to identify regional differences in economic outcomes. While most research uses administrative regional classifications to study these differences, this paper investigates how the spatial unit size of an LLM is likely to differ among population subgroups. It also assesses the role of spatial scale in measuring the benefits derived from concentration of economic activity.

This paper ‘Endogenous Local Labour Markets, Regional Aggregation and Agglomeration Economies’ is authored by Life Course Centre Research Fellow Dr Jordy Meekes of the Melbourne Institute: Applied Economic & Social Research at the University of Melbourne, in conjunction with Professor Wolter Hassink of the Utrecht University School of Economics in the Netherlands. The paper uses Dutch administrative data to define LLMs based on workers’ commute, gender and educational attainment. It provides a deeper understanding of the size of workers’ LLM and agglomeration externalities, which from a policy perspective is relevant for multiple socio-economic reasons.

Key findings from the paper include:

  • Low-educated and female workers are characterised by relatively small LLMs. This suggests place-based policies targeted at such workers, compared to those directed at other subgroups, may be more effective if specific, local and decentralised.
  • A positive effect of employment density on workers’ wages. The urban wage premium increases when using larger spatial unit sizes to operationalise LLMs and capture agglomeration externalities at a large spatial scale. This suggests urban and regional policies to increase such benefits and regional productivity growth should be centralised, i.e. city-region cooperation and geographic economic upscaling.
  • Workers who lose their job in higher-density LLMs experience positive agglomeration externalities on job matching, with more modest losses in wages. This is relevant for labour market policies that aim to increase the matching quality of worker to employer or limit wage inequality following negative employment shocks.

By gaining a better understanding of social disadvantage in terms of the size of workers’ LLMs as well as the winners of increasing urbanisation, this research touches upon an important societal trade-off between equality and efficiency.

You can read the full Working Paper here.