The Thick Market Effect on Local Unemployment Rate Fluctuations

32 Pages Posted: 18 Sep 2003

See all articles by Qinghua Zhang

Qinghua Zhang

Peking University - Guanghua School of Management

Li Gan

Texas A&M University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2003

Abstract

This paper develops a model to study how the thick market effect influences local unemployment rate fluctuations. The model demonstrates that the average matching quality improves as the number of workers and firms increases. Unemployed workers accumulate in a city until the local labor market reaches a critical minimum size, which leads to cyclical fluctuations in the local unemployment rate. Since larger cities attain the critical market size more frequently, they have lower unemployment rates, shorter unemployment cycles and lower peak unemployment rates. Our empirical tests are consistent with the predictions of the model. In particular, we find that an increase of two standard deviations in city size lowers the unemployment rate by 0.7 percentage points, decreases the peak unemployment rate by 0.3 percentage points, and shortens the unemployment cycles by about 0.7 months.

Keywords: thick market effect, local unemployment fluctuation, matching

JEL Classification: E3, J6, R0

Suggested Citation

Zhang, Qinghua and Gan, Li, The Thick Market Effect on Local Unemployment Rate Fluctuations (March 2003). Available at SSRN: https://ssrn.com/abstract=422382 or http://dx.doi.org/10.2139/ssrn.422382

Qinghua Zhang (Contact Author)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Li Gan

Texas A&M University - Department of Economics ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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