growth. However, this approach is difficult to implement because there are no consistent time series for a sufficiently long period for the stock of physical capital with a sector and a regional disaggregation. Some papers have used other measures of productivity and the evidence in these papers is more favorable to the importance of MAR externalities<sup>4</sup> . Lucio et al. (2002) study labor productivity using Spanish data and find that for regions with a high degree of sector concentration, increasing it further increases productivity growth. They find no effects of competition or diversity on labor productivity growth. Cingano and Schivardi (2002) construct a measure of productivity growth using firm level data, that is then aggregated into the region level<sup>5</sup> . They find evidence of MAR externalities for productivity growth and no effects that sector competition and diversity on local growth. These conclusions are at odds with their findings with the employment regressions, which show that sector concentration is associated with higher local growth.

In this paper I derive an alternative measure of productivity growth derived under the assumptions of local labor markets and heterogeneous workers. This measure is a wage adjusted regional growth rate, where the weights are a function of the employment growth of the different types of workers in the region. I show that this productivity measure can be derived from a model where technology is skill biased so that productivity growth and employment growth do not need to covary. Unfortunately, there are other problems related to the use of local employment growth that are also not addressed with my measure. These are the problems generated by congestition externalities arising from agglomeration economies (e.g. pollution) or from the low demand elasticity in some product markets. I use data from a matched employer-employee data set covering all the plants operating in Portugal between 1985 and 1994. This data has worker level information on total labor costs per employee supported by the plant and on the schooling and experience of the plant’s workforce. I find strong evidence of MAR externalities and no effect of Porter or Jacobs externalities when pooling all the manufacturing sectors together. The results for the sector regressions show that concentration fosters employment growth in some sectors<sup>6</sup> . Sector competition and sector diversity have no effect on productivity growth in most of the manufacturing sectors<sup>7</sup> . Furthermore, my findings show that the results for productivity growth

> 4 One exception is Gao (2003) that finds no evidence that concentration fosters industry growth in China. However, he uses output growth has a measure of productivity growth.

> 5 They assume that the firm technology is Cobb-Douglas and estimate total factor productivity growth by obtaining an estimate for the Solow residual.

> 6 For food, beverages and tabacco, non-metalic and mineral products and basic metals there is evidence that concentration fosters productivity growth.

> 7 The only exceptions is chemicals, where local competition fosters productivity growth and non-metalic and mineral

4