Localized knowledge spillovers and regional employment growth: evidence from Germany

The present paper aims at explaining the regional deconcentration of economic activities in (West) Germany during the past two decades. Using an idea-based endogenous growth model that encloses several innovative sectors, that subjects economic activity to externalities of agglomeration, and that alows for interregional labor migration, we test the hypothesis that human-capital intensive activities in (technical) manufacturing R&D, manufacturing management, and producer services continue to concentrate on agglomerations because of localized knowledge spillovers, while manufacturing production which does not benefit directly from knowledge spillovers deconcentrates because of agglomeration diseconomies. As an indicator of economic activities we use employment instead of value added since data on value added, resp. income, are not available from public statistics in Germany at a regionally and occupationally sufficiently disaggregated level. The empirical results on employment dynamics in 75 West-German regions during the time period 1976-1994 are in line with the hypothesis on spatial deconcentration of manufacturing production due to agglomeration diseconomies, but clearly reject the hypothesis on ongoing spatial concentration of high-skilled workers driven by knowledge spillovers. Thus, we conclude that in Germany localized knowledge spillovers may have been too weak to ensure endogenous growth. Finally, a number of shortcomings with respect to theory and data availability are discussed.