Estimating Agglomeration Economies with History, Geology and Worker Effects

Does productivity increase with density? We revisit the issue using French wage and TFP data.To deal with the ‘endogenous quantity of labour’ bias (i.e., urban agglomeration is consequenceof high local productivity rather than a cause), we take an instrumental variable approach andintroduce a new set of geological instruments in addition to standard historical instruments. Todeal with the ‘endogenous quality of labour’ bias (i.e., cities attract skilled workers so that theeffects of skills and urban agglomeration are confounded), we take a worker fixed-effectapproach with wage data. We find modest evidence about the endogenous quantity of labour biasand both sets of instruments give a similar answer. We find that the endogenous quality of labourbias is quantitatively more important.