The report outlines a general theoretical framework which allows the study of the economic linkages between places. It sets out the main mechanisms through which effects are transmitted and identifies key parameters that determine the direction and magnitude of effects. A review of the existing theoretical and empirical literature finds evidence of the existence of substantial agglomeration economies, which tend to place areas in a competitive relationship with each other. The authors argue that three relationships play a key role in determining the economic linkages between cities: the link between local employment and earnings; the link between local employment and the cost of living; and the migration response to differences in real wages between locations.

The research was commissioned to develop an analytical framework for considering economic linkages between cities.  This framework can be used to draw out the implications of existing theoretical models for the linkages between cities.

A general theoretical framework is presented to allow the study of economic linkages between places. This framework is used to structure a review of the existing theoretical and empirical literature. The empirical literature provides evidence of the existence of substantial agglomeration economies leading to areas being placed in competition with each other. The findings of the empirical literature and the implications of the study’s approach are discussed.

The research argues that there are three relationships which play a key role in determining the economic linkages between cities: the link between local employment and earnings, the link between local employment and the cost of living, and the migration response to differences in real wages between locations. The empirical evidence leads to three conclusions: the nature of the housing market in the UK means that the cost of living increases quickly with rising employment; this cost of living effect implies small migration flows between cities; and that the employment-earnings relationship may be upward sloping opening up the possibility for negative spillovers across cities.

Department for Communities and Local Government
Phone: +44 20 7944 4400
contactus@communities.gsi.gov.uk

01/01/2006

Pierre Philippe Combes (GREQAM); Gilles Duranton, Henry Overman, Anthony Venables (London School of Economics)

research

Urban Policy > Economy knowledge & employment

Urban economy