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.


Conte, M, I Mejean, T Michalski and B Schmutz (2024), ‘DP18925 The Volatility Advantages of Large Labor Markets‘, CEPR Discussion Paper No. 18925. CEPR Press, Paris & London. https://cepr.org/publications/dp18925