Industrial Agglomeration and Labor Market Pooling

Author Name NAKAJIMA Kentaro  (Hitotsubashi University) /OKAZAKI Tetsuji  (Faculty Fellow, RIETI / the University of Tokyo)
Creation Date/NO. March 2011 11-J-025
Research Project Risk-sharing and Matching in Industrial Agglomeration
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This paper empirically investigates the effect of industrial agglomeration through labor market pooling. Theoretical literature has shown that labor market pooling in industrial agglomeration can enhance expected profitability of firms by ironing out the firm-level idiosyncratic shocks, and recently Overman and Puga (2009) tested this theoretical hypothesis empirically, using data from the UK. Following Overman and Puga, we measured the magnitude of plant-level idiosyncratic shocks by industry, using the micro-data from the Manufacturing Census of Japan, and examined how it relates to the extent of plant agglomeration. It was confirmed that the magnitude of idiosyncratic shocks is positively associated with the extent of agglomeration of industries, and that this relationship is robust even if we control for other agglomeration factors, i.e., input-sharing and first nature. These results suggest that industrial agglomeration indeed enhances profitability through labor pooling in contemporary Japan.