Agglomeration in the Eu Regions

Based on a new economic geography (NEG) model by Puga (1999), we use the equilibrium wage equation to estimate two key structural model parameters for the NUTS II EU regions. These estimations enable us to come up with an empirically grounded free-ness of trade parameter. In line with NEG theory, the estimation results show that a spatial wage structure exists for the EU regions. By going back to the theoretical model we then analyze the implications of the free-ness of trade parameter for the degree of agglomeration. Our main findings suggest that agglomeration forces still have only a limited spatial reach in the EU. Agglomeration forces appear to be rather localized. At the same time, confronting our empirical results with the underlying new economic geography model also brings out the limitations of empirical research in new economic geography. JEL Code: F12, J31, R12. Steven Brakman Department of Economics University of Groningen P.O. Box 800 9700 AV Groningen The Netherlands [email protected] Harry Garretsen Utrecht School of Economics Utrecht University Vredenburg 138 3511 BG Utrecht The Netherlands [email protected] Marc Schramm Utrecht School of Economics Utrecht University Vredenburg 138 3511 BG Utrecht The Netherlands [email protected] Revised version of a paper presented at the HWWA conference “New Economic GeographyClosing the Gap between Theory and Empirics”, October 14-15 2004, Hamburg. This paper builds upon research carried out in collaboration with the Netherlands’ Bureau of Economic Policy Analysis (CPB) in The Hague. We would like to thank our discussant Thierry Mayer, an anonymous referee, Antonio Ciccone, Maarten Bosker, Matthieu Crozet, Joeri Gorter, Albert van der Horst, Thijs Knaap, Charles van Marrewijk and Diego Puga for comments and suggestions. We also would like to thank Steven Poelhekke for excellent research assistance. Finally, we are indebted to Dirk Stelder and Bertus Talsma for their help with the multiregion simulations.