What Causes City Growth? A Cross-Country Examination

Abstract

We examine the variation in regional employment growth across Europe as driven by different urban agglomeration effects. While cities are viewed as key to endogenous economic growth, there is a debate regarding the channel through which the urban agglomeration of workers and industries benefits growth: competition, specialization, or industrial diversity. Using firm level data across 10 European countries we construct the first comparable measures of local competition, regional specialization and industrial diversity to test which channel best explains city level industrial employment growth in each country and industry in our sample. Established results for the USA (competition and industrial diversity are positively associated with employment growth, while specialization negatively so) are generally robust across European countries. However, we find large differences in magnitudes across countries, with cities in the United Kingdom and Germany experiencing six times as much employment growth as cities in France from increased industrial diversity. Furthermore, examining the results by industry across countries reveals variations in the frequency of agglomeration effects: Germany enjoys the most frequent benefits from industrial diversity, and Finland the least. An Old Europe/New Europe divide does not explain the difference, neither can variations in industry shares.