Abstract
Locally increasing returns is the source of industrial agglomeration, and it improves regional labour productivity and drives up regional inequality. Using data of 261 cities in 2004 in China, I find that the estimated elasticity of (average) labor productivity with respect to employment density is about 8.8%, compared with 5% in the USA and 4.5% in the EU. Further, I find that the difference of agglomeration effects among provinces exists two cases: insignificant difference and significant difference. However, under the polarization of industrial location, both two cases enlarge the inequality of labor productivity among provinces, and drive up the divergence of regional income.
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