The Spatial Distribution of Wages and Employment: Testing the Helpman-Hanson model for Germany

Using German district data we estimate the structural parameters of a new economic geography model as developed by Helpman (1998) and Hanson (1998). The advantage of the Helpman-Hanson model is that it incorporates the fact that agglomeration of economic activity increases the prices of local (non-tradable) services, like housing. This model thereby provides an intuitively appealing spreading force that allows for less extreme agglomeration patterns than predicted by the bulk of new economic geography models. Generalizing the Helpman-Hanson model, we do not only test for the spatial distribution of wages but also for employment and land prices. In general we not only find support for a spatial wage and employment structure but also for relevance of the key structural parameters of the theoretical model. A comparison of our model with two alternative explanations indicates that our model specification with land prices is to be preferred. JEL-code: R10, R12, R23 1 Department of Economics, University of Groningen; Nijmegen School of Management, University of Nijmegen and CESifo; and the Centre for Germany Studies (CDS), University of Nijmegen, respectively. Please send all correspondence to Harry Garretsen, Nijmegen School of Management, University of Nijmegen, PO Box 9108, 6500 HK Nijmegen, the Netherlands. Phone: 00-31-243615889; e-mail: [email protected]. This version is a revision and extension of Brakman, Garretsen and Schramm (2001) and was written during our stay at the CESifo in Munich. We would like to thank Michael Roos, Michael Funke and seminar participants in Hamburg (HWWA), Groningen and Munich (CESifo) for their comments, and the CESifo for its hospitality.