Question

Economists have noted that businesses of a certain type tend to congregate geographically, attracting workers with skills in those fields. This, in turn, lures more firms seeking employees with those skills. Some examples include commercial banking, software development, and the automobile industry. What mechanism is at work here? Briefly explain how the mechanism works to the advantage of employers and employees.

Answer 1

The above question defines the types of businesses which would occur when the businesses have formed clusters. This means that these businesses tend to agglomerate, wherein the workers of the particular skill are attracted, thereby forming a network of attracting workers.

One important example in this case is of silicon valley. In case of silicon valley, the cluster was formed at a particular geographical location which attracted workers with special skills, in this case IT engineers and other related arees. This helped in expansion of the IT in that area thereby causing a network of luring more of the workers which led to forming of hub of such specialisation in Silicon valley.

This would have benefits for both employers and employees. The employee would have job opportunities within this cluster, since companies operating in this geographical Sector would be similar , it would not be difficult to find jobs . It would also be advantageous for the employer, since they would be able to hire from a pool of similar qualitfied people.

Also due to close proximity, there exists economies of scale because when large number of firms of an industry are at a same geographical location, it helps create increased productivity and this would also result in lower per unit costs

Another advantage of this type of network is spillover effects which works as a positive externality. In such cases , when one of the firms of the whole industry works out a patent or devises new technology , it creates spillover effects because the technology would also effect others in the same industry.

Hence this mechanism wherein businesses tend to conglomerate leads to spillover effects and forming of hubs and clusters which increases productivity because of close proximity of all the inputs and benefits both employers and employees.

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