Location Effects or Sorting? Evidence from Firm Relocation

Why are wages in New York or Paris higher than in other cities? This paper uses establishment mobility to separate the role of “location effects” (e.g., local geography, infrastructure, and agglomeration) from the spatial sorting of workers and firms. Using French administrative records and U.S. commercial data, we document that 4% of establishments relocate annually. Establishments retain their main activity and structure as they move, but adjust their workforce and wages. Combining establishment and worker mobility, we decompose wage disparities across French commuting zones. We find that spatial wage differences are largely driven by the sorting and co-location of workers and firms: location effects account for only 2–4% of disparities, while differences in the composition of workers and establishments account for 30% and 17%, respectively. The remaining half is accounted for by the co-location of high-wage workers and establishments, especially in cities with high location effects. Revisiting the elasticity of local wages to population density, we find a significant coefficient of 0.007—two to three times lower than estimates that do not control for establishment composition.