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The thick market effect of local unemployment rate fluctuation


  • Qinghua Zhang
  • Li Gan


This paper explores the relationship between city size and the pattern of unemployment rate fluctuations. We present a model of the local labor market in which in a thicker market, when more workers are looking for jobs and more job openings are available, the matching probability between jobs and workers is higher. Workers incur search cost if they actively search for for jobs. A higher matching probability makes searching for jobs more desirable. Unemployed workers accumulate in a local market until the market reaches a critical size such that the expected wage is higher than the search cost. Since a given shock produces more unemployed workers in a larger city during a time period, it takes less time for a larger city to reach the critical size described above. As a consequence, the model predicts: (1)Unemployment rates are lower in larger cities. (2) The length of unemployment cycles decreases as city size increases. (3) The peak unemployment rate is negatively correlated with city size. Our empirical analysis utilizes data that covers 295 PMSAs in the U.S. over the years 1981--1997. After controlling for the effects of industry composition and risk diversification, we find that city size has a significantly negative effect on the mean unemployment rate. In particular, if city size increases by two standard deviations, the unemployment rate will be lowered by roughly a half percentage point. We also find that larger cities have shorter unemployment cycles. In particular, the unemployment cycle will be shortened by roughly one month if city size increases by two standard deviations. Finally, we find shallower recessions for larger cities. The peak unemployment rates are lower by .3 percentage points if the city size increases by two standard deviations. All these empirical results are consistent with the predictions of the model.

Suggested Citation

  • Qinghua Zhang & Li Gan, 2004. "The thick market effect of local unemployment rate fluctuation," Econometric Society 2004 North American Winter Meetings 179, Econometric Society.
  • Handle: RePEc:ecm:nawm04:179

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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Gan, Li & Li, Qi, 2016. "Efficiency of thin and thick markets," Journal of Econometrics, Elsevier, vol. 192(1), pages 40-54.
    3. FU, Shihe & DONG, Xiaofang & CHAI, Guojun, 2010. "Industry specialization, diversification, churning, and unemployment in Chinese cities," China Economic Review, Elsevier, vol. 21(4), pages 508-520, December.
    4. Schaeffer, Peter V. & Gebremedhin, Tesfa G., 2009. "Expected Time to Employment as a Function of Labor Market Size: A Theoretical Note," The Review of Regional Studies, Southern Regional Science Association, vol. 39(3), pages 287-295.
    5. Marusca De Castris & Guido Pellegrini, 2015. "Agglomeration Effects On Regional Unemployment In Europe," Working Papers 0715, CREI Università degli Studi Roma Tre, revised 2015.
    6. Wheeler, Christopher H., 2008. "Local market scale and the pattern of job changes among young men," Regional Science and Urban Economics, Elsevier, vol. 38(2), pages 101-118, March.
    7. Li Gan & Qinghua Zhang, 2006. "The Thick Market Effect on Housing Markets Transactions," NBER Working Papers 12134, National Bureau of Economic Research, Inc.
    8. Philip J. Cook & Jens Ludwig & Sudhir A. Venkatesh & Anthony A. Braga, 2005. "Underground Gun Markets," Working Papers id:245, eSocialSciences.
    9. 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.
    10. Herz, Benedikt, 2017. "Specific Human Capital and Wait Unemployment," MPRA Paper 76777, University Library of Munich, Germany.
    11. Peter Schaeffer & Tesfa Gebremedhin, 2004. "Labor Market Size and Unemployment Duration: A Theoretical Note," Working Papers Working Paper 2004-08, Regional Research Institute, West Virginia University.
    12. André Mollick, 2008. "What explains unemployment in US–Mexican border cities?," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 42(1), pages 169-182, March.
    13. Li, Shuo & Tu, Yundong, 2016. "n-consistent density estimation in semiparametric regression models," Computational Statistics & Data Analysis, Elsevier, vol. 104(C), pages 91-109.
    14. Qi Li & Jeffrey Scott Racine, 2006. "Nonparametric Econometrics: Theory and Practice," Economics Books, Princeton University Press, edition 1, number 8355.
    15. 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.
    16. Yang, Guangliang & Li, Lixing & Fu, Shihe, 2017. "Do Rural Migrants Benefit from Labor Market Agglomeration Economies? Evidence from Chinese Cities," MPRA Paper 80713, University Library of Munich, Germany.
    17. repec:rri:wpaper:200408 is not listed on IDEAS
    18. Alessandro Gavazza, 2011. "The Role of Trading Frictions in Real Asset Markets," American Economic Review, American Economic Association, vol. 101(4), pages 1106-1143, June.
    19. Jeffrey A. Groen, 2005. "Occupation-Specific Human Capital and Local Labor Markets," Working Papers 376, U.S. Bureau of Labor Statistics.
    20. Zhang, Qinghua, 2007. "A micro-foundation of local business cycles," Regional Science and Urban Economics, Elsevier, vol. 37(5), pages 568-601, September.

    More about this item


    thick market effect; local unemployment fluctuation; matching;

    JEL classification:

    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor


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