Abstract
It is a well known fact that wages have a tendency to be higher in larger regions. The source of the regional difference in wages between larger and smaller areas can be broadly divided into two parts. The first part can be attributed to the fact that regions have different industrial compositions. The second part is due to the fact that average regional productivity differs between regions. Using a decomposition method, akin to shift-share, we are able to separate regional wage disparities into an industrial composition component and productivity component. According to theory it is expected that productivity is higher in larger regions due to different kinds of economies of agglomeration. Also, larger regions are able to host a wider array of sectors compared to smaller regions. Output from sectors demanding a large local or regional market can only locate in larger regions. Examples of such sectors are e.g. various types of advanced services with high average wages. The purpose of the paper is to explain regional differences in wages and the productivity and composition components, respectively.
The paper tests the dependence of wages, productivity and industrial composition effects on regional size (using a market potential measure). In the estimation we control for regional differences in education, employment shares, average firm size and self-employment. Swedish regional data from 2004 are used. The results verify that larger regions on average have higher wages, originating from higher productivity and more favorable industry composition.
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Notes
- 1.
Blanchflower and Oswald (1990).. Refer to 16 previous studies in this topic between 1985 and 1990. The earliest study is by Bils 1985, who also supported an unemployment – wage elasticity of − 0.1.
- 2.
Calculations based on figures from Statistics Sweden, 2004
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Appendices
Appendix 1: Descriptive Statistics
Relationship between market potential and regional average wage
Relationship between market potential and regional productivity index
Relationship between market potential and regional industrial composition index
In Table 8.4 the relationships between the three variables are presented.
Appendix 2: Regional Descriptive Statistics
Values corresponding to map groups
Appendix 3: Testing for Spatial Errors
SE = Spatial error model
SL = Spatial lag model
Appendix 4: Regression Results Omitting the Control Variables
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Klaesson, J., Larsson, H. (2013). Wages, Productivity and Industry Composition. In: Klaesson, J., Johansson, B., Karlsson, C. (eds) Metropolitan Regions. Advances in Spatial Science. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-32141-2_8
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