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Local labor market dynamics and agglomeration effects

Author

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  • Deschamps, Pierre
  • Wilemme, Guillaume

Abstract

Local labor market conditions are strongly persistent. Using a search-and-matching model with agglomeration effects and worker and firm migration, we study the transitional dynamics of a regional economy. The model is fitted to mimic local labor market dynamics using state-level U.S. time series. Agglomeration economies generate strong persistence in the employment level response to a labor demand shock, while agglomeration diseconomies dampen the shock. The amplification of the local unemployment rate response critically depends on wage rigidity. Short-term place-based policies can help the region since they dampen the impact of the shock on the employment level.

Suggested Citation

  • Deschamps, Pierre & Wilemme, Guillaume, 2025. "Local labor market dynamics and agglomeration effects," European Economic Review, Elsevier, vol. 180(C).
    • Handle: RePEc:eee:eecrev:v:180:y:2025:i:c:s0014292125001965
    DOI: 10.1016/j.euroecorev.2025.105146
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    Keywords

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    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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