The price of productivity

We construct a new micro-geographic commercial rent index for Germany to study the capitalization of agglomeration economies into floor space prices. In large local labor markets, commercial rents decline by -17% per kilometer from the central business district, compared to 13% for residential rents, reflecting stronger agglomeration benefits at the center. Commercial rents in central business districts increase with local labor market size at an elasticity of 15%, implying that wage responses capture only about half of the agglomeration effect on total factor productivity.