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The Volatility Advantages of Large Labor Markets

Author

Listed:
  • Maddalena Conte
  • Isabelle Méjean
  • Tomasz Michalski

    (HEC Paris - Ecole des Hautes Etudes Commerciales)

  • Benoît Schmutz

Abstract

Firms' labor demand is more volatile in larger cities. We propose and test a novel explanation for this finding. Faster hiring conditions attract productive firms with more volatile activity to denser locations where they can swiftly downsize or expand. We estimate a model of firm location choice using French data and show that (i) firm volatility is almost as predictive of location choice as productivity; (ii) both dimensions reinforce each other. This mechanism reduces the productivity--density gradient among volatile firms. Imperfectly correlated firm-level shocks, combined with higher operating costs induced by density, generate matching economies.

Suggested Citation

  • Maddalena Conte & Isabelle Méjean & Tomasz Michalski & Benoît Schmutz, 2024. "The Volatility Advantages of Large Labor Markets," Working Papers hal-05107340, HAL.
    • Handle: RePEc:hal:wpaper:hal-05107340
    DOI: 10.2139/ssrn.4744092
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