Firm-worker matching in industrial clusters

In this article we use a novel approach and a large Portuguese employer-employee panel data set covering most of the economy to study Alfred Marshall's hypothesis that industrial agglomeration improves the quality of firm-worker matching. Our method employs recent developments in the estimation and analysis of models with high-dimensional fixed effects. Using wage regressions with controls for multiple sources of observed and unobserved heterogeneity, we find little evidence that the quality of matching increases with firm clustering within the same industry. This result supports Freedman (2008) analysis of the software industry in one U.S. state. Since our final regressions still uncover evidence for a large wage premium from industrial clustering, the results suggest that agglomeration advantages may stem from sources beyond labor matching. The wage premium also improves with urbanization economies, in line with previous work.