DP5172 Urbanization Externalities, Market Potential and Spatial Sorting of Skills and Firms

Author(s): Giordano Mion, Paolo Naticchioni
Publication Date: August 2005
Keyword(s): firms' heterogeneity, panel data, skills, sorting, spatial externalities
JEL(s): J31, J61, R23, R30
Programme Areas: Labour Economics, International Trade and Regional Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5172

Using a matched employer-employee dataset on Italy we look at the spatial distribution of wages among provinces. We find evidence of both urbanization and market potential externalities, with the second one being more relevant. However, spatial sorting of skills is at work and explains a great deal of spatial wage variability. We further show that this sorting is only partially due to migrations and it dampens estimates of spatial externalities. The evidence concerning the sorting of firms is instead quite weak. In the paper, we also find support of self-selection of migrants based on skills and a moderate evidence of the wage growth hypothesis. Finally, we show that the well-established correlation between the employer size and workers' skills is not simply the outcome of a co-location phenomenon.