The Geography of Unemployment

Unemployment rates differ widely across local labor markets. I offer new empirical evidence that high local unemployment emerges because of elevated local job losing rates. Local employers, rather than local workers or location-specific factors, account for most of spatial gaps in job stability. I then propose a theory in which spatial differences in job loss emerge in equilibrium because of systematic differences between employers across local labor markets. The spatial allocation of heterogeneous employers in turn follows from their spatial sorting decisions. Labor market frictions induce productive employers to over-value locating close to each other. The optimal policy incentivizes them to relocate towards areas with high job losing rates, providing a rationale for commonly used place-based policies. I estimate the model using French administrative data. The estimated model accounts for over three fourths of the cross-sectional dispersion in unemployment rates and for the respective contributions of job losing and job finding rates. Inefficient location choices by employers amplify spatial unemployment differentials five-fold. Both real-world and optimal place-based policies can yield sizable local and aggregate welfare gains.