Measuring agglomeration economies in business services

The post-industrial city-system is characterized by rapidly increasing shares of employment in service industries. Despite this trend, empirical studies on agglomeration economies and location theory continue to concentrate on the manufacturing sector. The forces which are presently shaping the spatial economy need closer examination. If agglomeration economies do exist in the service sector, then the continued concentration of economic activity may be advantageous to facilitate the exchange of information vital to advanced economies. Regional development policies need to exploit the economies present in an area by attracting those industries which benefit from its productivity advantages.;This paper presents a model which measures agglomeration economies in business service industries. A labor market model is developed using a demand equation derived from the CES production function. This equation is solved simultaneously with a labor supply equation using a two-stage least squares regression technique. A measure of agglomeration economies is constructed from the parameter estimates of the demand equation using a pooled data set from 1977 and 1982 across all SMSAs for which data is reported in census documents. Two levels of aggregation are tested, business service industries (SIC 73) in the two- and four-digit (SIC 7392) categories.;Since data at the industry level is used, the agglomeration economies measured are primarily localization economies. The results suggest that these economies are very strong in small SMSAs but insignificant in larger ones. This is contrary to most theoretical assumptions about business services.;This study is unique in that it is the first time this methodology is extended to service industries. Also, the estimation procedure and sample design are structured to isolate scale economies from other productivity factors. This is done by controlling for some of these factors and including others as independent variables.