Local Labor Market Dynamics and Agglomeration Effects

Abstract

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