Giacomo Carlini (National Bank of Slovakia)
This paper investigates why assortative matching between workers and firms is stronger in large cities than in small cities. I develop a search and matching model with heterogeneous workers and firms to analyze how worker composition and labor market frictions affect equilibrium sorting. I calibrate the model to match salient moments of matched employer-employee data from Germany. I find that matching efficiency plays a major role in explaining differences in assortative matching across cities. Moreover, the effect is amplified by a more disperse workers productivity distribution, since there are higher returns from matching with similar types for both workers and firms. Using the calibrated model, I show that around 5% of GDP gap observed between large and small cities can be explained by differences in assortative matching. Overall, the paper stresses the importance of studying local labor market frictions and workers productivity distribution together to understand why the allocation between heterogeneous workers and firms vary between cities, and the resulting implications for spatial inequality.