The Short and Long Run Causality between Agglomeration and Productivity

Abstract

This study is to investigate the short- and long-run causal relationship between agglomeration (localization and urbanization) economies and labor productivity in the manufacturing sector of 28 Iranian provinces over an 11-year period, 2001–2011. Fully Modified Ordinary Least Squares (FMOLS) method was used to estimate our long-run panel data model. The empirical findings suggested that localization and urbanization economies had a positive and statistically significant effect on labor productivity in the long-run equilibrium. Then, the Generalized Method of Moments (GMM) was employed to examine Granger Causality between each pair of variables. The results revealed a bidirectional short-run Granger causality between localization economies and labor productivity. Additionally, a bidirectional short-run causal relationship was found between urbanization economies and labor productivity for all the manufacturing industries. In the long run, however, there seemed to be bidirectional causality between localization economies and productivity and also between urbanization economies and labor productivity in each manufacturing industry.