Question

Question 2 (Interpreting empirical evidence on agglomeration economies) A few sentences on each part. 2.1) Why are higher wages in bigger cities an indication of the existence of agglomeration economies? 2.2) What is the main concern with interpreting urban wage premia as evidence of agglomeration economies?

Answer 1

ANSWER 2.1) Agglomeration economies refer to the gains that come when firms and workers locate near one another together in cities and industrial clusters. The higher wages are one of the main causes that workers are attracted to large cities. It can be due to the more productive from knowledge spillovers and better fit of workers from deep markets. The high-skilled workers tend to concentrate in large cities; and learning by working in big cities they get higher growth in wages because they accumulate valuable experiences that are not available in rural areas. Thus higher wages in urban areas are an indication of the existence of agglomeration economies