The deepening of European integration and the removal of artificial barriers to factor mobility has made an understanding of industrial location increasingly central to the formulation of regional policy. In Discussion Paper No. 917, Research Fellow Jürgen von Hagen and George Hammond consider the influence on industries' location of the `localization economies' first identified by Marshall: firms drawing from a common labour pool may pay lower average wages over time and smooth firm-specific demand shocks, while workers benefit from implicit insurance against such shocks; firms may also benefit from more specialized non-traded assets and knowledge spillovers. They investigate these effects for employment data from four US metropolitan areas for three durable manufacturing industries.

With labour pooling, changes in employment levels for firms in each local industry should yield a stronger negative correlation than those for firms in different local industries. With asset sharing, however, industry-wide shocks dominate; linkages will again be stronger within than among local industries, while their employment changes will also show a stronger correlation within each locality than across regions, which may be positive or negative. Their results confirm that idiosyncratic shocks are more strongly correlated within than among local industries, which indicates that industries have strong links at the regional level. Within-region correlations also tend to be positive in mature labour markets but negative in expanding labour markets; asset sharing may therefore become the dominant source of localization economies as markets mature.

These results have interesting implications for the European Union, whose industries are still geographically dispersed. If EMU reduces inherited barriers to factor mobility, the geographical concentration of industries will increase, and industry-specific shocks will be more closely associated with regional shocks. If it increases the effect of asymmetric shocks on European regions, however, demands for their fiscal stabilization will increase, for which the terms of the Maastricht Treaty currently leave the EU ill equipped.

Industrial Localization. An Empirical Test for Marshallian Localization Economies
Jürgen von Hagen and George Hammond

Discussion Paper No. 917, February 1994 (IT/IO)