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The Thick Market Effect on Local Unemployment Rate Fluctuations

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  • Li Gan
  • Qinghua Zhang

Abstract

This paper studies how the thick market effect influences local unemployment rate fluctuations. The paper presents a model to demonstrate that the average matching quality improves as the number of workers and firms increases. Unemployed workers accumulate in a city until the local labor market reaches a critical minimum size, which leads to cyclical fluctuations in the local unemployment rates. Since larger cities attain the critical market size more frequently, they have shorter unemployment cycles, lower peak unemployment rates, and lower mean unemployment rates. Our empirical tests are consisten with the predictions of the model. In particular, we find that an increase of two standard deviations in city size shortens the unemployment cycles by about 0.72 months, lowers the peak unemployment rates by 0.33 percentage points, and lowers the mean unemployment rates by 0.16 percentage points.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11248.

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Date of creation: Apr 2005
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Publication status: published as Gan, Li and Qinghua Zhang. "The Thick Market Effect on Local Unemployment Rate Fluctuations." Journal of Econometrics 133, 1 (July 2006): 127-152
Handle: RePEc:nbr:nberwo:11248

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Citations

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Cited by:
  1. Peter Schaeffer & Tesfa Gebremedhin, 2004. "Labor Market Size and Unemployment Duration: A Theoretical Note," Working Papers 200408, Regional Research Institute, West Virginia University.
  2. Coulson, N. Edward & Fisher, Lynn M., 2009. "Housing tenure and labor market impacts: The search goes on," Journal of Urban Economics, Elsevier, vol. 65(3), pages 252-264, May.
  3. Fu, Shihe & Dong, Xiaofang & Chai, Guojun, 2008. "Industry specialization, diversification, churning, and unemployment in Chinese cities," MPRA Paper 15339, University Library of Munich, Germany.
  4. Philip J. Cook & Jens Ludwig & Sudhir Venkatesh & Anthony A. Braga, 2005. "Underground Gun Markets," NBER Working Papers 11737, National Bureau of Economic Research, Inc.
  5. Zhang, Qinghua, 2007. "A micro-foundation of local business cycles," Regional Science and Urban Economics, Elsevier, vol. 37(5), pages 568-601, September.
  6. Christopher H. Wheeler, 2007. "Local market scale and the pattern of job changes among young men," Working Papers 2005-033, Federal Reserve Bank of St. Louis.
  7. Alessandro Gavazza, 2011. "The Role of Trading Frictions in Real Asset Markets," American Economic Review, American Economic Association, vol. 101(4), pages 1106-43, June.
  8. André Mollick, 2008. "What explains unemployment in US–Mexican border cities?," The Annals of Regional Science, Springer, vol. 42(1), pages 169-182, March.
  9. Sainan Jin & Yukako Ono & Qinghua Zhang, 2007. "Demand volatility and the lag between the growth of temporary and permanent employment," Working Paper Series WP-07-19, Federal Reserve Bank of Chicago.
  10. Li Gan & Qinghua Zhang, 2006. "The Thick Market Effect on Housing Markets Transactions," NBER Working Papers 12134, National Bureau of Economic Research, Inc.
  11. Li Gan & Qinghua Zhang, 2013. "Market Thickness and the Impact of Unemployment on Housing Market Outcomes," NBER Working Papers 19564, National Bureau of Economic Research, Inc.
  12. Jeffrey A. Groen, 2005. "Occupation-Specific Human Capital and Local Labor Markets," Working Papers 376, U.S. Bureau of Labor Statistics.
  13. Qi Li & Jeffrey Scott Racine, 2006. "Nonparametric Econometrics: Theory and Practice," Economics Books, Princeton University Press, edition 1, volume 1, number 8355.

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