Firms operating in dense labour markets are more productive, although understanding the mechanisms behind this relationship is both challenging and contentious.
This paper uses a newly assembled dataset on location and labour productivity of most New Zealand firms to examine the role of location patterns at the industry, local labour market, and industry* location levels. We derive estimates in the presence of firm, location, and period fixed effects, paying particular attention to controlling for unobserved local and industry factors.
Our findings confirm that labour productivity is higher for firms in geographically concentrated industries ("localisation"), for firms in more industrially-diversified labour markets ("urbanisation"), and for firms operating in larger labour markets.
Controlling for heterogeneity of industries, locations, and firms, we find some support for a positive productivity effect of changes in both localisation and urbanisation, although not all estimated effects are statistically and economically significant.