Skill-biased agglomeration economies: a spatial perspective on demand for college graduates, Sweden 2000-2019

Abstract: Several recent studies document that relative demand for skilled workers is becoming increasingly biased toward large cities and metropolitan regions. This development has been interpreted as suggestive evidence of increasing complementarity between skills and agglomerations of economy. We explore whether these claims extend to the Swedish labor market. By studying public income data from 2000 to 2019 through the lens of the canonical model of skill-biased technical change, enriched with factor-biased agglomeration forces, we find that annual growth in relative demand for college graduates differed 1.31 percentage points between Sweden's least and most dense municipalities. We also build further on recent literature by relating three key characteristics of municipal labor markets to economic density and growing demand for college graduates: spatial concentration of (i) non-routine tasks, (ii) business services, and (iii) job polarization. Out of the three explored mechanisms, our results suggest that local specialization in non-routine tasks best accounts for the increasing density-bias in demand for college graduates. The interpretation of our findings is however limited by data availability and we propose that future research further investigate the link between demand for college graduates and the spatial organization of economic activity.