DP17494 Labor Misallocation Across Firms and Regions
We develop a frictional labor market model with multiple regions and heterogeneous firms to study how frictions impeding labor mobility across space aaffect the joint allocation of labor across firms and regions. Bringing the model to matched employer-employee data from Germany, we find that spatial frictions generate large misallocation of labor across firms within regions. By shielding firms from competition for workers from other regions, spatial frictions allow low productivity firms to expand, reducing aggregate productivity. Overall, we show that taking into account the characteristics of the local labor market is important to quantify the aggregate losses from spatial frictions.