Based on micro data on individual workers for the period 2000–2005, we show that wage differentials in the Netherlands are small but present. A large part of these differentials can be attributed to individual characteristics. Remaining effects are partially explained by variations in employment density, with an elasticity of about 4.8 percent, and by Marshall‐Arrow‐Romer externalities, where doubling the local share of a (two‐digit) industry results in a 2.9 percent higher productivity. We also find evidence for small negative effects of competition (Porter externalities) and diversity (Jacobs externalities).