Labour Pooling as a Source of Agglomeration: An Empirical Investigation

We provide empirical evidence on the role of labour market pooling in determining thespatial concentration of UK manufacturing establishments. This role arises because largeconcentrations of employment iron out idiosyncratic shocks and improve establishments'ability to adapt their employment to good and bad times. We measure the likely importanceof labour pooling by calculating the fluctuations in employment of individual establishmentsrelative to their sector and averaging by sector. Our results show that sectors whoseestablishments experience more idiosyncratic volatility are more spatially concentrated, evenafter controlling for a range of other industry characteristics that include a novel measure ofthe importance of localized intermediate suppliers.