Matching in Cities

67 Pages Posted: 5 Nov 2018

See all articles by Wolfgang Dauth

Wolfgang Dauth

Institute for Employment Research (IAB)

Sebastian Findeisen

University of Zurich; IZA Institute of Labor Economics

Enrico Moretti

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Jens Suedekum

University of Duisburg-Essen

Multiple version iconThere are 2 versions of this paper

Date Written: November 2018

Abstract

In most countries, average wages tend to be higher in larger cities. In this paper, we focus on the role played by the matching of workers to firms in explaining geographical wage differences. Using rich administrative German data for 1985-2014, we show that wages in large cities are higher not only because large cities attract more high-quality workers, but also because high-quality workers are significantly more likely to be matched to high-quality plants. In particular, we find that assortative matching—measured by the correlation of worker fixed effects and plant fixed effects—is significantly stronger in large cities. The elasticity of assortative matching with respect to population has increased by around 75% in the last 30 years. We estimate that in a hypothetical scenario in which we keep the quality and location of German workers and plants unchanged, and equalize within-city assortative matching geographical wage inequality in Germany would decrease significantly. Overall, assortative matching magnifies wage differences caused by worker sorting and is a key factor in explaining the growth of wage disparities between communities over the last three decades.If high-quality workers and firms are complements in production, moreover, increased assortative matching will increase aggregate earnings. We estimate that the increase in within-city assortative matching observed between 1985 and 2014 increased aggregate labor earnings in Germany by 2.1%, or 31.32 billion euros. We conclude that assortative matching increases earnings inequality across communities, but it also generates important efficiency gains for the German economy as a whole.

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Suggested Citation

Dauth, Wolfgang and Findeisen, Sebastian and Moretti, Enrico and Suedekum, Jens, Matching in Cities (November 2018). NBER Working Paper No. w25227. Available at SSRN: https://ssrn.com/abstract=3278527

Wolfgang Dauth (Contact Author)

Institute for Employment Research (IAB) ( email )

Regensburger Str. 104
Nuremberg, 90478
Germany

HOME PAGE: http://www.iab.de/en/ueberblick/mitarbeiter.aspx/Mitarbeiter/603

Sebastian Findeisen

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Enrico Moretti

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://emlab.berkeley.edu/~moretti/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Jens Suedekum

University of Duisburg-Essen

Lotharstrasse 1
Duisburg, 47048
Germany

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