Discussion paper
DP18925 The Volatility Advantages of Large Labor Markets
Firms' labor demand is more volatile in larger cities. We propose and test a novel explanation for this finding. Faster hiring conditions attract productive firms with more volatile activity to denser locations where they can swiftly downsize or expand. We estimate a model of firm location choice using French data and show that (i) firm volatility is almost as predictive of location choice as productivity; (ii) both dimensions reinforce each other. This mechanism reduces the productivity-density gradient among volatile firms. Imperfectly correlated firm-level shocks, combined with higher operating costs induced by density, generate matching economies.
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