Published 16 May 2018

Regional agglomeration of skills and earnings

– from convergence to divergence?

During the last three decades, we find a distinct pattern of skill divergence across regions. The uneven distribution of human capital is reinforced by the mobility of the
highly educated population. This pattern coincides with declining or even reversed income convergence across Swedish regions, a development which could have potentially important implications for both national and regional economic policy.

In this paper, we analyse the geographical distribution of skills and the human capital content of migration flows between Swedish local labour markets. The study is based on detailed longitudinal population register data. During the last three decades, we find a distinct pattern of skill divergence across regions. The uneven distribution of human capital is reinforced by the mobility of the highly educated population. The pattern of skill divergence coincides with declining or even reversed income convergence across Swedish regions. The skilled regions become both more skilled and richer, while the less skilled regions lag behind. This development has potentially important implications for both regional and national economic policy.

Increased regional divergence of human capital and earnings

We find a positive and robust correlation across Swedish regions between the initial share of workers with a university degree and the change in this share during the last three decades. Local labour markets with high initial shares have consistently experienced a larger increase in the share of university educated workers. We further find that the migration behaviour of individuals with a university degree reinforces the pattern of skill divergence across regions. Metropolitan regions receive considerable net in-migration flows of young university graduates, the most prone to migration, while medium-sized and small regions experience large net out-migration flows. Larger regions are not only net attractors of young university graduates in quantitative terms, but we also find a distinct migration pattern in qualitative terms. Our results reveal that the share of university educated migrants moving upwards in the regional hierarchy increases sharply in the upper end of the ability distribution. The higher the grades in upper secondary school, the higher the share of university graduates that move from smaller to larger regions. Migration upwards in the regional hierarchy is also found to be associated with relatively strong family backgrounds of migrants in terms of parents’ education and earnings. We further find that the earnings of both low-skilled and high-skilled workers increase with the share of highly educated workers in the region and the size of the region. Finally, our results show that the rising geographical segregation of the skilled is accompanied by declining or even reversed income convergence across Swedish regions during the last 25 years. The tendency for increased regional dispersion in earnings in recent decades departs from the long run historical development.

Housing and transport infrastructure can be important policy measures

Contrary to the development during large parts of the previous century, regional inequalities have been rising in more recent years. This is the case in the United States as well as in many European countries, including Sweden as this study show. In many countries, growing income disparities and regional polarization has marched side by side with political polarization. Some authors argue that regional economic divergence has become a threat to economic progress, social cohesion and political stability. The growing regional inequalities certainly call for some type of policy action but it is not obvious what the policy response to this development should be. Policy initiatives needs to be place-specific and will most likely involve difficult equity-efficiency trade-offs.

The positive relationship between worker productivity and earnings and the size of regions and cities is well documented in economic research. The descriptive evidence in this paper also points clearly in this direction. The fact that productivity and earnings seem to increase with the size of regions implies that national productivity and economic growth can be stimulated by increased labour supply in larger regions. In the current economic situation, firms seem to have trouble finding sufficient numbers of workers with suitable skills. This is the case in many parts of the country but especially so in the metropolitan areas. Constraints in the housing market and the transport infrastructure are potentially important explanations for why firms in the metropolitan regions find it increasingly difficult to fill vacancies. Although labour market prospects look bright in the metropolitan regions, individuals may find it difficult to find affordable housing at acceptable commuting distances. Presumably, this is the case for young workers in particular, who have limited economic resources of their own. Policy initiatives that increase the supply of housing in the metropolitan areas would enable more workers to take advantage of the highly productive environments in these regions and thereby contribute to both regional and national productivity and economic growth. Recent studies from the United States suggest that the economic benefits from increased supply of housing in the metropolitan areas can be rather large.

Another important field for policy initiatives is investments in transport infrastructure that both facilitates efficient intra-regional mobility in metropolitan regions and stimulates increased functional integration between the metropolitan areas and surrounding smaller regions. Such investments could include maintenance of existing infrastructure as well as investments in new infrastructure and public transportation. This would allow small and medium-sized regions to tap into the agglomeration advantages of metropolitan regions. This could also offer some relief for the tight housing and labour markets in the metro­politan regions. Although the potential returns from increased functional integration of local labour markets probably are highest around the metropolitan areas, there is also potential scope for gains further down in the regional hierarchy.

When it comes to labour supply response to regional inequality, it is important to underline that regional effects are very different depending on whether the response is in terms of commuting or migration. The costs for the sending regions are generally much lower in the case of commuting. As opposed to migration, commuting does not erode the local tax base and purchasing power. This will contribute to upholding the supply of both local public and private services in the sending regions. In addition, commuting, unlike migration, does not cause downward pressure on local house prices. From the perspective of the receiving regions, commuting increase the labour supply without causing additional pressure on already tight housing markets. Policy reforms that encourage commuting rather than migration from lagging regions to more thriving areas thus have the potential to balance the difficult equity-efficiency trade-off between regional equality and national economic efficiency.

Future studies

This paper is purely exploratory in nature and perhaps raises more questions than it answers. Based on the findings in this study, and results from other research in the field, we identify three topics that merit additional attention. One involves attempting to further disentangle the exact mechanisms behind the observed positive relationship between worker productivity and earnings and the size of regions and cities. Another is to study the role of commuting for geographic spreading of agglomeration economies across regions. The third is to more carefully study how constraints in the housing market affect the geographical mobility and productivity of workers.

Title
Regional agglomeration of skills and earnings – from convergence to divergence?

Serial number
PM 2018:09

Reference number
2018/025

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