published in: Journal of Urban Economics, 2004, 56 (2), 217-43
We study the impact of local economic structure on employment dynamics. Local
employment is decomposed into the product of the average plant size and the number of
plants in the area and industry. We estimate the dynamics of both components
simultaneously using French yearly data on 36 industries and 341 areas between 1984 and
1993. The careful specification of short-run dynamics and the control for fixed effects and
endogeneity are shown to be critical in the empirical model. First, static externalities are
prevalent compared to dynamic ones. Moreover, whereas area-and-industry effects explain
most of the spatial variation of plant size, the local number of plants is mainly driven by the
current local economic structure. Policies targeted towards plant creation should thus be
more efficient. For instance, large areas endowed with a small number of even size industries
have both more and larger plants. A large number of plants heterogeneous in size increases
the average plant size, but the number of plants is higher when plants have similar size.
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