Pagination on custom taxonomy

Try adding 'paged' => get_query_var( 'page' ) to your query.

EDIT : For pagination to work properly the posts per page should be greater than ‘Blog pages show at most’ under Settings-> Reading section of the WordPress Admin. So there are two ways you can make this work out.

1. You can set ‘Blog pages show at most’ to 1. This would show 1 post in all the blog pages unless you specify post_per_pages specifically for each query.
2. The other option you have would be to use the pre_get_posts filter.

Example of pre_get_post filter to limit the no. of posts on a location taxonomy archive page to 2 posts per page.

function location_posts( $query ) {
    if( is_tax( 'location' ) ) {
        $query->set('posts_per_page', '2');
    }
    return $query;
}
add_filter('pre_get_posts', 'location_posts');