By means of theoretical and empirical analysis agglomeration economies as localized returns to scale are established as the basic source of economic disparity. The central implication for the labor market is the resulting path dependency of the spatial employment pattern. As an empirical investigation of migration within Germany documents strong regional segmentation in the short run, local wage formation is of particular importance for the adjustment process in response to changes of the spatial employment pattern. However, a theoretical discussion shows that in the German setting with centralized wage bargaining local wages tends to be inflexible. This view is supported by an empirical investigation of the spatial wage structure in Germany using district data.
