This paper investigates the positive relation between firm productivity, measured for a wide sample of manufacturing industries, and employment density in local labour market areas in Italy (agglomeration economies). Furthermore, we investigate the possibility that, all other things being equal, the lower productivity of firms in Southern Italy might be due to the lower employment density in those areas.
After conducting several robustness checks, we find that the elasticity of TFP with respect to the spatial concentration of economic activities in Italy is about 6 per cent, similar to that measured for other developed countries. Moreover, we confirm that the lower productivity of firms in Southern Italy is partially explained by the lower employment density in those areas. We also show that no significant heterogeneity emerges in the intensity of agglomeration economies across the country.
