Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

Abstract: This paper reassesses the relationship between density and productivity by using detailed geo-coded data on wages and employment in Sweden. The contribution is empirical and builds on an analysis of spatial units of exactly the same size in terms of geographic surface. The data divide Sweden into areas of one square kilometer, and describe each area in terms of wages, worker characteristics and industry structure. Since the geographic areas are of constant size, the sheer number of employees in an area is an ‘exact’ measure of employment density. We find a significant relationship between density and productivity across squares. The estimated elasticity is in the 9-10 percent interval, and is insensitive to whether we employ a standard OLS estimator or a panel fixed effects estimator. Neighbor characteristics also matter in ways consistent with the idea of positive agglomeration externalities, where a location in a square with high density neighbors reflects proximity to (or a location in) a larger agglomeration. Moreover, the estimated relationship between productivity and density is insensitive to the chosen spatial scale.

Keywords: density; productivity; spatial dependence; geo-coded data; external scale economies; agglomeration externalities; Sweden; Modifiable Areal Unit Problem (MAUP)

JEL-codes: C21; R11; R12

22 pages, August 25, 2011

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