Local labor market dynamics and agglomeration effects

Pierre Deschamps and Guillaume Wilemme

European Economic Review, 2025, vol. 180, issue C

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. The model is fitted to mimic local labor market dynamics using state-level U.S. time series. Agglomeration economies generate strong persistence in the employment level response to a labor demand shock, while agglomeration diseconomies dampen the shock. The amplification of the local unemployment rate response critically depends on wage rigidity. 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 (search for similar items in EconPapers)
JEL-codes: J21 J61 L26 R13 R23 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:180:y:2025:i:c:s0014292125001965

DOI: 10.1016/j.euroecorev.2025.105146

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