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The Thick Market Effect on Local Unemployment Rate Fluctuations

  • Li Gan
  • Qinghua Zhang

This paper studies how the thick market effect influences local unemployment rate fluctuations. The paper presents a model to demonstrate that the average matching quality improves as the number of workers and firms increases. Unemployed workers accumulate in a city until the local labor market reaches a critical minimum size, which leads to cyclical fluctuations in the local unemployment rates. Since larger cities attain the critical market size more frequently, they have shorter unemployment cycles, lower peak unemployment rates, and lower mean unemployment rates. Our empirical tests are consisten with the predictions of the model. In particular, we find that an increase of two standard deviations in city size shortens the unemployment cycles by about 0.72 months, lowers the peak unemployment rates by 0.33 percentage points, and lowers the mean unemployment rates by 0.16 percentage points.

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File URL: http://www.nber.org/papers/w11248.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11248.

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Date of creation: Apr 2005
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Publication status: published as Gan, Li and Qinghua Zhang. "The Thick Market Effect on Local Unemployment Rate Fluctuations." Journal of Econometrics 133, 1 (July 2006): 127-152
Handle: RePEc:nbr:nberwo:11248
Note: LS
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