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Understanding employment decentralization by estimating the spatial scope of agglomeration economies

CPB Discussion Paper 342, 21 February 2017

This paper argues that the spatial decay function of agglomeration economies is much more complex than is often assumed in the agglomeration literature. We provide insight into this issue by analyzing a nationwide and spatially rich wage panel. The key finding is that wages and urbanization are not significantly related on short distances (<5km), while strongly and positively related on medium distances (5-10km).

This positive effect attenuates across geographic space and becomes insignificant after 40-80km. This non-monotone relation between wages and distance to economic mass is in line with recently observed trend towards employment decentralization, because it suggests that agglomeration economies on short distances, i.e. in city centers, are offset by congestion externalities. Additionally, this paper finds no evidence that foreign economic mass affects wages in the Netherlands, which suggests that national borders are still a substantial barrier for economic interaction.

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