The regional literature suggests that local labor markets offer significant operating advantages to firms in knowledge-intensive industries and thus influence the development of contemporary industrial location patterns. Utilizing two data sets containing information on the employment changes of US semiconductor engineers during the critical formative period (1950–75), the author tests the pooling and anchoring hypotheses of urban economic theory while extending the theory to incorporate the effects of labor and firm specialization. Findings include: (1) moderate evidence of locality-centered labor pooling in this occupation during this early time period; (2) no evidence of anchoring by nonmarket actors, such as universities and government laboratories or by early labor markets; and (3) evidence that agglomerations of firms develop as a result of imperfect skill-opportunity matches. The results discount frequently offered explanations for the emergence of industrial agglomerations and suggest that agglomerations are not the outcome of firms' searches for operating efficiencies but may be a product of entrepreneurship induced by particular ‘permanently failing’ firms.
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