Abstract
Regional unemployment rates are strongly persistent. Using a search-and-matching model of a local labor market with firm and worker migration, we study how agglomeration effects amplify labor demand shocks. When firms disappear in the model, productivity decreases which discourages incoming firms and slows regional recovery. Agglomeration effects amplify the magnitude and persistence of the unemployment response. We simulate the model to determine the critical factors responsible for the amplification. Amplification is stronger when firm migration reacts strongly to local conditions, and when labor migration reacts weakly. This implies that fixed wages greatly amplify the effect of agglomeration economies on regional shocks.
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