Competition, Wage, and Agglomeration Diseconomy

Abstract

In contrast to most literature which explored the sources and effects of agglomeration externalities, this research explores the other side, that is, how agglomeration diseconomy is formed and how it works. The emphasis is on competition in labor market. It is found that the wage per industry worker increases significantly due to competition among firms in the labor market in South Korea’s manufacturing industries, even when the value added per industry worker (henceforth “value-added per worker”) remains the same. The portion determined by this competition in the average industry wage is found to lead to a decrease in the “degree of agglomeration” of the manufacturing industry, as measured by the number of workers in the industry, the employment share of the industry among all employment in a city, and the location quotient of the manufacturing industry. It can be said that agglomeration diseconomy is formed by competition among firms in the labor market and that it has worked to weaken the degree of agglomeration.