Two-sided sorting of workers and firms: Implications for spatial inequality and welfare
Guangbin Hong
No 71, CLEF Working Paper Series from Canadian Labour Economics Forum (CLEF), University of Waterloo
Abstract:
High-skilled workers and high-productivity firms co-locate in large cities. In this paper, I study how the two-sided sorting of workers and firms affects spatial earnings inequality, efficiency of the allocation of workers and firms across cities, and the welfare consequences of place-based policies. I build a general equilibrium model in which heterogeneous workers and firms sort across cities and match within cities. I estimate the model using Canadian matched employer-employee data and decompose the urban earnings premium, finding that worker and firm sorting account for 67% and 27% of this premium, respectively. The decentralized equilibrium is inefficient as low-productivity firms overvalue locating in high-skilled cities. The optimal spatial policy would incentivize high-skilled workers and high-productivity firms to co-locate to a greater extent while redistributing income towards low-earning cities, leading to a 6% increase in social welfare. Model counterfactuals underscore the importance of two-sided sorting when evaluating distributional and aggregate outcomes of place-based policies.
Keywords: Two-sided sorting; matching; spatial inequality; place-based policies; optimal spatial policy (search for similar items in EconPapers)
JEL-codes: E25 R12 R13 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-geo and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:clefwp:300864
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