On the Contribution of Agglomeration Economies to the Spatial Concentration of U.s. Employment

Why does the level of economic activity vary so much across space? One reason given is “agglomeration economies,” meaning that a firm’s or household’s production costs (of market and home goods, respectively) are lower when production is carried out in close proximity to other firms and households. In this paper I explore, via a quantitative spatial macroeconomic model, the contribution of agglomeration economies to the observed spatial concentration of US employment. The approach is analogous to “business-cycle accounting” or “growth accounting.” The results of the “spatial accounting” performed in this study depend on the details of the model used. The critical detail pertains to how the model rationalizes the stability of lowdensity localities. If it is rationalized via an appeal to restrictions on labor mobility, the accounting implies that the bulk of spatial concentration results from an unequal distribution of natural advantages. In contrast, if it is rationalized via an agglomeration threshold (an employment level below which local increasing returns do not operate), the accounting implies that the bulk of the spatial concentration results from increasing returns.