An empirical measure for labor market density

In this paper we derive a structural measure for labor market density based on the Ellison and Glasear (1997) "Index for industry concentration". This labor market density measure serves as a proxy for the number of workers that can reach a certain work area within a reasonal amount of traveling time. We apply this measure to a standard wage equation and find that it takes account of almost half of the cross region wage variance (not explained by other observables). Moreover, it explains substantially more than the traditional density measure: people per square mile.