Economists have long hypothesized that large and thick labor markets facilitate the matching of workers to firms (Marshall, 1920). In urban economics models, labor pooling has long been assumed to be a potentially important advantage of large cities. Large labor markets are thought to enhance productivity by improving the likelihood of matching workers to firms and increasing the quality of these matches. But despite the importance of this question, the empirical literature is still in its infancy. 

In this paper, we use administrative longitudinal data from the LEHD between 20010 and 2018 to follow 640,000 workers who lost their jobs due to a firm closure.  We investigate whether the labor market outcomes after a layoff are different for workers who are located in a large labor market compared to otherwise similar workers located in a small labor market, holding constant the level of local market tightness. We use two alternative measures of labor market size: employment in the Commuting Zone; or employment in the Commuting Zone-industry pair. 

We find that displaced workers in large labor markets experience significantly shorter non-employment spells than otherwise identical workers in small markets. The implied difference in non-employment duration between large and small markets is economically significant. A college graduate located in the commuting zone-industry pair at the 90th percentile of the size distribution has a 13.4 percentage points (or 20.3%) higher probability of finding a new job within 6 months of separation compared to a college graduate located in the commuting zone-industry pair at the 10th percentile of the size distribution. For high school graduates, the corresponding difference in probability is 8.5 percentage points (or 14.0%).  Thus, labor market size provides insurance against idiosyncratic employment shocks. This insurance is particularly valuable to highly educated workers, presumably because their human capital is more specialized.

Second, conditional on finding a job, the quality of the new match is better in larger markets. We use three measures of quality: (a) whether the industry of the new employer is a good fit for the worker's college major; (b) whether the displaced worker is reemployed in the same industry; whether the new job lasts one year or more. We find that after a firm closure, job seekers in large markets are significantly more likely to find jobs in industries that are a good fit for their college major; to find jobs in their previous industry; and find jobs that last at least one year.  The elasticities of these three measures of match quality with respect to market size are significantly larger for college graduates compared to high school graduates. 

Third, we find that displaced workers in larger markets have a lower probability of moving to a new commuting zone than displaced workers in smaller markets.  Finally, we find that the spouses of displaced workers in large markets experience a significantly higher probability of employment one year after the focal worker’s displacement. This reflects both the lower probability of disruption caused by relocation for movers and the higher probability of finding a match for stayers.           

Overall, our evidence is consistent with the existence of self-reinforcing agglomeration economies stemming from labor pooling. Our findings help explain the growing attraction of large cities to skilled workers and the existence and growth of Silicon Valley-style high-tech clusters.

Professor Enrico Moretti is the Michael R. Peevey and Donald Vial Professor of Economics at the University of California, Berkeley. He serves as the Editor in Chief of the Journal of Economic Perspectives and is a Visiting Scholar at the Federal Reserve Bank of San Francisco. He is also Research Associate at the National Bureau of Economic Research (Cambridge), Research Fellow at the Centre for Economic Policy Research (London) and the Institute for the Study of Labor (Bonn). Professor Moretti’s research covers the fields of labor economics and urban economics. He has received several awards and honors, including the Society of Labor Economists’ Rosen Prize for outstanding contributions to labor economics, the Carlo Alberto Medal, the IZA Young Labor Economist Award and a Fulbright Fellowship. His book, “The New Geography of Jobs”, has been translated in eight languages and was awarded the William Bowen Prize. He holds a Ph. D. in Economics from University of California, Berkeley in 2000.