A dynamic approach to the tendency of industries to cluster

4. Tendencies of co-location across functional regions -
a simultaneous approach

4.1 Model specification & description of variables

Since the employment in the manufacturing and producer service sectors will be
modeled simultaneously, a system of equations is subject to estimation. The equation
system is based on Equation (12a) and (12b) in Section 2.1 and is presented in Equation
(13a) and (13b). Here, the employment in manufacturing in region R, is a function of the
accessibility to producer service employment (and vice versa) along with some
exogenous variables, which will be specified below.

(13a)    MR = a + φ ₁ PRa + φ2ωR + φ3D^urban + φ4(D^urlbcan * PRa ) + εR

(13b)    PR = δ + γ₁MR + γ2KR + γ3D^urban + γ4(Durban * MR)+ μR

In Table 4.1., the variables appearing in the equation system above is explained¹¹.
Manufacturing employment is a function of the accessibility to producer services and
wage-sum per inhabitant. The latter variable is used as proxy for consumer expenditure.
Likewise, producer service employment is a function of the accessibility to
manufacturing employment and the average knowledge intensity of the workforce. Both
manufacturing and producer service employment as well as the accessibility to these
variables are expressed in units per square kilometer, i.e. they are expressed in density
terms.

Table 4.1. Description of variables, superscripts and symbols.

The average knowledge-intensity of the workforce is incorporated in the equation for
producer services. In view of the fact that the producer service sector is a knowledge-
intensive sector, this is a justified set-up. It can at least be expected that a large pool of
skilled workers imply low search costs¹³. Furthermore, a dummy for urban regions and an

¹¹ The instrumental variables are not listed in the table. The instrumental variables are the exogenous variables in
the system plus predetermined values of the endogenous ones.

¹² The average knowledge intensity is defined as the total number of employed with a university education of 3
years or longer divided by the total employment.

¹³ Also, a large supply of potential employees implies that a firm has a strong position in the wage negotiations.

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