Agglomeration and Sorting

Recent papers suggest a strong interaction between agglomeration externalities and humancapital. We develop a multi-region model with regional heterogeneity in workers and jobs,tradable versus non-tradable (land) commodities, consumption amenities and regional houseprices. The model allows for two forms of spatial organization: cities and rural areas. Themodel fits the regional data on the fixed wage effects, the return and mean level of humancapital, land prices, and the city-rural area distinction well. We analyse a Mincerian wageequation with regional fixed effects and variation in the return to human capital, using dataon 47 states and 34 metropolitan areas for the US. Agglomeration externalities are stronglyrelated to the human capital stock. We show that regional difference in house prices offsetthese externalities. The contribution of agglomeration externalities to GDP capitalizes in landvalues. We use these land values to calculate the value of agglomeration. Joint with Yujiang Chen.

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JEL classification:J24, J31, I26, R12, R13
Keywords:Wage Differential, Human Capital, Spillover Effect, Spatial Equilibrium.