Local Multipliers, Mobility, and Agglomeration Economies

• Date: 01 July 2017
• Published date: 01 July 2017
• Author: Sachiko Kazekami
• DOI: http://doi.org/10.1111/irel.12183

Local Multipliers, Mobility, and Agglomeration

Economies*

SACHIKO KAZEKAMI

This paper demonstrates that when one new job is generated by attracting a new

business in the tradable sector in a local economy, a significant number of addi-

tional jobs are created in the nontradable sector when labor mobility is high.

However, these multipliers disappear when labor mobility is low. This paper con-

firms that regions with higher labor inflow have larger multipliers. Furthermore,

the spillover effect of agglomeration economies in the tradable sector is signifi-

cantly positive on the nontradable sector.

Introduction

Job creation is a major topic of political discussion in the present era of

slow growth in Japan. Previous studies (Black, McKinnish, and Sanders 2005;

Carrington 1996; Moretti 2010b; Moretti and Thulin 2013) attempted to deter-

mine the number of additional jobs in other sectors that are generated by a sin-

gle new job, i.e., multipliers. This paper demonstrates that the magnitude of

the multiplier differs depending on labor mobility using Japanese data from

high- and low-mobility eras and differences in the labor-inflow rates of com-

muting zones. This paper benefits from Japanese cases that face decreasing

labor mobility over time and by region. Labor mobility affects the elasticity of

the labor supply, which Moretti (2010a) noted as one of the important factors

determining the magnitude of multipliers. Additionally, this paper demonstrates

that agglomeration economies in the tradable sector determine the magnitude

*The author’saffiliation is Chukyo University, Nagoya, Japan Email: sachikok@mecl.chukyo-u.ac.jp. The

author appreciates Enrico Moretti, Yuji Genda, Ryo Kambayash, and editors and reviewers of this journal

for very helpful comments. The author thanks the financial support provided by the Ministry of Education,

Culture, Sports, Science and Technology in Japan and Japan Society for the Promotion of Science (Grant

number: 25380377) and Chukyo University Research Fund. The author appreciates the University of Califor-

nia, Berkeley, for providing facilities. The author is also grateful to the Ministry of International Affairs and

Communications Statistics Bureau and the Ministry of Health, Labor and Welfare for providing the Estab-

lishment and Enterprise Census and the Basic Survey on Wage Structure. I constructed the dataset using

these data.

JEL: J23, J61.

INDUSTRIAL RELATIONS, Vol. 56, No. 3 (July 2017). ©2017 Regents of the University of California

Published by Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington

Road, Oxford, OX4 2DQ, UK.

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of the multipliers on the nontradable sector, whereas previous studies indicate

that the difference in the magnitude of the multipliers depends on worker skills

and industries. The local number of workers, particularly in rural areas, and

population today are decreasing in Japan. This demographic change has been

one reason to decrease mobility and to prevent agglomeration. A change in

employment structure is the other reason. Going to college in one’s hometown

also might have an effect. If this paper finds positive effects of mobility and

agglomeration on multiplier size, policies such as the subsidy to promote

agglomeration economies, redesign local cities for appropriate manufacturing

size, subsidy of housing particularly for young people and job seekers who

hesitate to apply for a job vacancy far away, are efficient for encouraging

employment growth.

Moretti (2010a) demonstrated the theory of the spatial equilibrium of local

labor markets and explained the multipliers in his theory. Considering the

effect of new jobs in the tradable sector on the nontradable sector, he noted

that employment in the nontradable sector, such as restaurants, real estate,

cleaning services, legal services, construction, medical services, retail, and per-

sonal services, among others, grows because the city has more workers and

wages are higher. If the local labor supply is upward sloping, wages are higher

when the city has more jobs. He noted that the magnitude of the multipliers

depends on the three factors. First, the magnitude depends on consumer prefer-

ences for the nontradable sector and the technology in the nontradable sector.

Second, it depends on the types of new jobs in the tradable sector. Adding

skilled jobs should be a greater multiplier than adding unskilled jobs because

skilled jobs pay higher wages and therefore generate a greater increase in the

demand for local services. Third, the magnitude relates to the elasticities of

local labor and the housing supply. If those elasticities are not infinite, local

wages, housing costs, and price in the nontradable sector increase following

the addition of jobs in the tradable sector. The addition of jobs in the tradable

sector partially crowds out jobs in other industries. If the local labor supply is

very elastic, for example, when labor mobility is not limited (i.e., high labor

mobility), then this crowding out is more limited, and the increase in the labor

cost is small, making the multiplier greater. This paper places emphasis on this

third point. Mobility in Japan is discussed in the next section.

When labor moves and gathers, agglomeration economies occur. Moretti

(2010a) argued spatial equilibrium with agglomeration. He noted that the pres-

ence of agglomeration economies in a city results in an increase in the equilib-

rium nominal wage; the nominal wage in cities with agglomeration economies

and increased productivity is greater than the nominal wage in cities without

agglomeration economies. In addition, the larger magnitude of the agglomera-

tion spillover effect increases the equilibrium nominal wage to a greater

490 / SACHIKO KAZEKAMI