Agglomeration Economies: The Spark That Ignites a City?

www.phil.frb.org Business Review Q4 2003 7 www.phil.frb.org employment in the U.S. is located in metropolitan areas, and these areas account for 24 percent of the total land area of the country. Why is employment so heavily concentrated in selected areas of the country? Economists think that spatial concentration of employment (or, more generally, economic activity) develops for two very different reasons. The first reason — and one that comes most readily to mind — is that a location attracts people and businesses because of the presence of some valuable natural resource. Petroleum, coal, lumber, minerals, and proximity to a n industrially developed countries, employment is heavily concentrated in cities. A concentration of workers and businesses in one location — what economists call agglomeration economies — lowers production costs. In fact, most economists believe that in the absence of agglomeration economies, the spatial distribution of employment would be much more even. In this article, Satyajit Chatterjee discusses his research, which questions this belief. He finds that while agglomeration economies are an important factor, they’re not the most important one. The combined effects of factors unrelated to agglomeration economies, such as the availability of natural resources and local economic policies, appear to account for the bulk of the spatial concentration of U.S. employment. I BY SATYAJIT CHATTERJEE