Local Labor Market Dynamics and Agglomeration Effects
42 Pages Posted: 14 Oct 2021 Last revised: 17 Jul 2023
Date Written: July 1, 2023
Local labor market conditions are strongly persistent. Using a search-and-matching model with agglomeration effects and worker and firm migration, we study the transitional dynamics of a regional economy. We estimate the impact of a negative shock on the local labor market using state-level U.S. data to provide moments that are then matched to the simulated model. Agglomeration effects and migration elasticities are critical factors responsible for the persistent employment level response. Short-term place-based policies can help the region since they dampen the impact of the shock on the employment level.
Keywords: agglomeration economies, local labor markets, search frictions, transitory dynamics
JEL Classification: J21, J61, L26, R13, R23
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