Abstract
We construct a model of agglomeration economies in a labor market with friction and heterogeneity of both workers and firms. With friction, matches between workers and firms are random. We show that with random matches, an increase in the number of workers brings improvements in worker–firm match quality and agglomeration economies emerge if and only if the technology of search exhibits increasing returns to scale. We then discuss how to find out empirically whether this condition is satisfied. Furthermore, we investigate properties of the agglomeration economies here and the relation between the city size and states of a labor market.
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