The Size and Sources of Productivity Differentials across UK Functional Urban Areas, 2003-2010

Abstract

This paper employs a new definition of urban areas as functional economic units developed by the OECD in collaboration with the European Union to investigate the size and sources of productivity disparities across urban areas in Great Britain. We use data from the UK Annual Survey of Hours and Earnings and the UK Labour Force Survey between 1997 and 2010 and a two-step estimation procedure that accounts for bias in the extent of agglomeration economies arising from individual sorting and area fixed unobservables. Our results suggest that doubling the population of a city in Great Britain, would, on average, increase city productivity by 1%. The magnitude of these estimates appear much smaller than those in the literature and suggests that previous studies from the UK that adopt urban area definitions based on strictly administrative boundaries may exaggerate the extent of agglomeration economies.