In this thesis we demonstrate how important the existence of a pool of qualified workers within the local labour market is for the process of job creation and the location of economic activity. In chapter 1 the basic theoretical model is developed. Using a matching model it is shown that Job Creation will be higher if firms have a larger pool of qualified workers from which to fill their vacancies, since their expected profits per vacancy opened will be greater. At the same time, individuals have a higher incentive to invest in education if job creation is higher. The interaction between these two forces generates a pecuniary externality in the labour market. In chapter 2, we extend the theoretical model by considering two regions and the possibility of migration. In equilibrium, areas where the pool of qualified workers is larger attract more jobs and skilled workers. Job Creation will be higher in such areas since firms located there are able to find a more qualified worker with greater ease. At the same time, given the sunk cost of moving, only the most skilled workers will find migration to these areas worthwhile. The interaction between these two forces generates a pecuniary externality that encourages concentration of economic activity in areas with a larger pool of qualified workers. In chapter 3 we estimate the effect of the pecuniary education externality on the process of matching in the UK regional labour market in the 1990s. We find a significant effect of the average level of education in a region on the conditional probability of finding a job in that region using a duration model. This effect is positive for skilled occupations and negative for unskilled ones. Finally, in Chapter 4 we estimate the effect of the education externality on the individual decision to stay-on in education. We find that the share of the region's working age population with degree has a positive and significant effect on the education decisions of sixteen and eighteen year-olds, while the share with high vocational has a similar effect for seventeen year-olds
