LABOR HETEROGENEITY, WAGE BARGAINING, AND AGGLOMERATION ECONOMIES

The modern economy is characterized by increasing returns to scale, diverse production technology, and specialized labor requirements. With heterogeneous production technology, increasing returns to scale, and specific labor requirements, we show that average productivity increases with the size of the labor market. The larger the size of the market, the better the matches between workers and firms, resulting in lower on-the-job-training costs. Through the wage bargaining between firms and workers, the savings in training costs are transmitted into higher wages. © 1990.