Does agglomeration explain regional income inequalities?

Abstract

This paper seeks to explain regional income inequalities in Norway. Similar to the EU countries, Norway is characterized by substantial income disparities. I use sub-regional NUTS 4 data for the Norwegian manufacturing sector to analyze to what extent agglomeration effects and skills can explain regional variation in productivity and income. Both intra-sectoral and inter-sectoral agglomeration effects are analyzed. The reported estimates suggest the presence of both types, and that the latter are slightly stronger than the former. Contrary to popular views, I moreover find that location and agglomeration effects have become more, not less, important. In contrast to empirical evidence on sources of regional inequalities in other European countries, skill composition as a determinant of regional income variations appears to have declined in importance over time. Hence, high income appears to be an outcome of high activity density – agglomeration – rather than being due to differences in education and skills.