Working Paper: NBER ID: w11248
Authors: Li Gan; Qinghua Zhang
Abstract: 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.
Keywords: Thick Market Effect; Unemployment Rate Fluctuations; City Size; Labor Market Dynamics
JEL Codes: J64; R23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| City Size (R12) | Peak Unemployment Rate (J64) |
| City Size (R12) | Average Unemployment Rate (J64) |
| City Size (R12) | Length of Unemployment Cycle (J64) |