Search, Sorting, and Urban Agglomeration

Abstract

Studies have suggested that urban agglomeration enhances productivity by facilitating the firm‐worker matching process. This article develops a model that formalizes this notion and demonstrates that, when firm capital and worker skill are complementary in production, urban agglomeration will tend to generate more efficient, yet segregated matches. As a result, not only will local market size be positively associated with average productivity, it will also generate greater between‐skill‐group wage inequality and a higher expected return to skill acquisition. Recent data from the counties and metropolitan areas of the United States is consistent with each of these implications.