appear in the units of institutions, including the rest of the world and the place of residence of
these institutions.
In this section, the results of an econometric study of real wages and externality effects in
the Danish urban system are presented. In section 5 an analysis of the redistribution of these
effects to end users is presented, using the subregional model LINE, presented in section 4.
3.1 Estimating urban and pecuniary externality effects: the two approaches
Two different approaches to analysis of the relationships between proximity, incomes and
externalities are dealt with in the following. In order to estimate the effects of urban
externalities the key spatial unit is the place of production, as the type of externality is
production-production. In the case of pecuniary externalities, the spatial units of interest are
both place of production and place of residence because demand and supply in the labour
market involves these two components.
The first approach is based upon the hypothesis that there is a positive externality affecting
production associated with proximity to the urban centre and that the externality is affected
by distance decay. Here distance is measured from place of production to an urban centre.
The externality is on the production side and producers are able to pay higher wages because
workers are more productive near the urban centre because of knowledge spillovers. Firms
located near the centre also benefit from the externality. An important question concerns the
definition of a centre. In this study, three different measures are employed: distance from
place of production (defined at the level of the municipal authority) to i) the urban centre in
the (statistically defined) Danish labour market areas, ii) the capital Copenhagen, and iii) the
nearest of the five large university towns: Copenhagen, Ârhus, Odense, Aalborg, and Esbjerg.
The second approach is based upon the hypothesis that commuting distance is positively
related to wage levels. Commuting distance is from place of residence to place of production.
It can be interpreted as a workplace disamenity and therefore workers require a higher wage if
they have a longer commuting distance.
3.2 Explanations of differences in wage levels, not involving externality effects
In addition to distance, factors such as gender, age, education, and industry are often
significant. Research confirms in the Danich case relationships between wage levels on the
one hand and age, education and sex on the other (Albæk et al. 1999, Trigg and Madden
1995, and Berndt, 1991). If industry enters into the explanation, different sectors have
different proportions of factor inputs (capital and labour) and may have better opportunities to
exploit proximity advantages (cluster effects). The fact that wage levels are normally higher
in the private sector (Berndt1991), indicates that political decisions concerning production
levels in the public sector are not based upon the wage equals the value of the marginal
product principle.
3.3 The data
The Social Accounting Matrix for Danish Municipalities (SAM-K) is the main data source in
this study, and a complete description of the data is presented in Madsen et al. (2001b) and
Madsen & Jensen-Butler (2005). Two main sub-sets of SAM-K are used, originating in
register-based data at individual level, which are then grouped by variable.
Data used to estimate the urban externality effects has the following structure. The dependent
variable is mean value of wages and salaries per person defined in relation to the categories
used to group the individual values of the independent variables. Grouped data was used as
data at individual level was not available. The independent variables are principally category
variables, representing, for each of the 275 municipalities, where place of production is