Productivity and Local Workforce Composition
Discussion
Overall, our findings support the existence of agglomeration effects that operate through labour markets. Firms operating in areas where a high proportion of the workforce is degree qualified have higher multi-factor productivity, even controlling for the quality of the firms' own labour input. The benefits of a skilled local workforce are relatively strong for firms in industries that use skilled labour intensively, and for firms in high R&D industries. This is consistent with the advantages of thick labour markets. It may also indicate positive sorting based on the returns to local skill spillovers.
We confirm a positive relationship between productivity and population density, which is consistent with a range of agglomeration mechanisms. We find that the relationship is strongest for firms operating in the densest areas. In fact, in dense areas, the composition of the local workforce is not significantly related to productivity once we have controlled for density. The benefits of density are stronger for small firms and for new firms, consistent with firm life cycle models of agglomeration (Duranton and Puga, 2001).
In contrast, the proportion of the population that is new to the area, and the proportion that are foreign born are not positively related to firm productivity. An exception is that firms in industries that provide local goods and services are more productive in areas where more migrants and new entrants to the area are found. This suggests that some of the productivity advantages associated with new entrants may stem from product market effects rather than from knowledge spillovers.
When we disaggregate the local workforce more finely, by skill, nativity and recency of arrival, we find some evidence of a positive productivity effect of highly skilled migrants who have recently arrived in the area[16]. The pattern of results across groups does not, however, tell a consistent story, and may reflect the changing composition of migrants over time. The productivity advantages of locating in areas where there is a high proportion of New Zealand-born entrants are positive but more modest than for foreign born. They are also stronger with highly qualified New Zealand-born entrants than for those who are lower skilled.
The findings of the current study contrast with those of a related study, which used similar data to examine whether local workforce composition is positively related to innovation outcomes reported by firms (Mar et al, 2010). In that study, we found that the positive raw correlation between innovation outcomes and local workforce composition was completely accounted for by controlling for local industry mix, and key firm-level measures such as firm size, labour quality, or having any research and development expenditure.
The existence of human capital spillovers raises the possibility that productivity may be increased by spatial policies that promote the accumulation and spatial distribution of skills. As noted by Glaeser and Gottlieb (2008), however, a national policy to exploit such spillovers requires knowledge of which areas are likely to benefit most. Our study highlights heterogeneity in the benefits firms receive from different dimensions of workforce composition. This is an important step in the design and targeting of potential spatially-oriented policies.
[16] Note that migrants who have recently arrived in the area are not necessarily recent arrivals in New Zealand – they may have been in New Zealand for many years.
