It is generally believed that jobs are created when a new firm enters the market or when an existing firm expands its production by setting up additional subsidiaries. It is also commonly accepted that cities strive to attract firms seeking a location in order to raise urban employment. Casual observation suggests, however, that firms already established in a city often feel threatened by the entry of new firms into the urban labour market. Indeed, entering firms may simply meet their labour requirements by taking workers away from existing firms by increasing wages.

In Discussion Paper No. 1011, Masahisa Fujita, Research Fellow Jacques-François Thisse and Yves Zenou argue that the choice of a particular location within a city is a key factor in the creation of jobs by new firms. This issue is addressed in the context of a standard urban setting in which existing firms are set up in the city centre and where workers compete in both the land and labour markets. Since the new firm is assumed to be large relative to city size, it anticipates the impact of this location on the residential equilibrium that emerges when new workers migrate to the city. Different urban configurations may emerge depending on the reactions of the existing firms to the entry of the new firm into the labour market. It appears that more jobs are created if the firm sets up far enough away from the city centre.

Firm Location and Job Creation in Cities
Masahisa Fujita, Jacques-François Thisse and Yves Zenou

Discussion Paper No. 1011, September 1994 (IO/IT)