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CEP discussion paper
The Plant Size-Place Effect: Agglomeration and Monopsony in Labour Markets
Alan Manning
January 2007
Paper No' CEPDP0773:
Full Paper (pdf)

JEL Classification: J21; J42; R23

Tags: agglomeration; labour markets; monopsony

This paper shows, using data from both the US and the UK, that average plant size is larger in denser markets. However, many popular theories of agglomeration – spillovers, cost advantages and improved match quality – predict that establishments should be smaller in cities. The paper proposes a theory based on monopsony in labour markets that can explain the stylized fact – that firms in all labour markets have some market power but that they have less market power in cities. It also presents evidence that the labour supply curve to individual firms is more elastic in larger markets.