Density of Economic Activity and Labor Productivity in Iranian Provinces

This study investigates the effect of density of economic activity, defined as the intensity of labor and physical capital per square kilometer, on labor productivity in the Iranian provinces.. The density of economic activity has positive effects on labor productivity in several channels such as increasing returns to scale, knowledge spillover, and specialization. Also, the density of economic activity has negative effects on labor productivity because of congestion and pollution. The empirical results show that a higher density of economic activity has led to an increasing labor productivity in 28 provinces of Iran over the period 2001-2011. We find that doubling the density of economic activity on average increases labor productivity by around 63 percent.