Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/300864 
Authors: 
Year of Publication: 
2024
Series/Report no.: 
Working Paper Series No. 71
Publisher: 
University of Waterloo, Canadian Labour Economics Forum (CLEF), 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.
Subjects: 
Two-sided sorting
matching
spatial inequality
place-based policies
optimal spatial policy
JEL: 
E25
R12
R13
Document Type: 
Working Paper

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