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Wages, Productivity and Industry Composition

In: Metropolitan Regions

Author

Listed:
  • Johan Klaesson

    (Jönköping University)

  • Hanna Larsson

    (Jönköping University)

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.

Suggested Citation

  • Johan Klaesson & Hanna Larsson, 2013. "Wages, Productivity and Industry Composition," Advances in Spatial Science, in: Johan Klaesson & Börje Johansson & Charlie Karlsson (ed.), Metropolitan Regions, edition 127, chapter 0, pages 167-192, Springer.
    • Handle: RePEc:spr:adspcp:978-3-642-32141-2_8
    DOI: 10.1007/978-3-642-32141-2_8
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