Local Unemployment, Worker Mobility and Labor Market Outcomes: Evidence from Germany

In most countries, there are large and highly persistent differences in unemployment rates across local labor markets. Such local unemployment rate differences can shape the career outcomes of young who start their careers in different local labor markets. I use high-quality administrative data from Germany to study how workers move between labor markets with different unemployment rates and their resulting lifecycle wage profiles. I find that on average workers who start their careers in lower unemployment regions earn higher wages even when young, experience greater wage growth along the lifecycle, and spend less time in unemployment. Even conditional on local price levels and worker fixed effects, I find that between workers from high and workers from low unemployment regions, an unexplained wage gap opens up to about 11% until the age of 40. Despite this, I do not find that workers move out of bad labor markets and into good labor markets. Instead, workers spend most of their time in local labor markets with similar relative degrees of unemployment. I find that the differences in wages and unemployment translate into a gap of about 150,000 Euros (adjusted to 2010 level) in real income accumulated until the age of 55.