Size Matters:
The Benefits of Large Labor Markets for Job Seekers
Enrico Moretti (Berkeley and NBER)
Moises Yi (U.S. Census Bureau)
January 2023
Abstract. Economists have long hypothesized that large and thick labor markets facilitate
matching between workers and firms (Marshall, 1920). Large labor markets are thought to enhance
productivity by improving the likelihood of matching of workers to firms and increasing thequality of these matches. Market size should be particularly beneficial for workers with highly
specialized human capital who may have a higher probability of finding employers who value theirskills when the number of firms to choose from is large.
In this paper, we use administrative longitudinal data from the LEHD between 2010 and2018 to follow 640,000 workers who lost their jobs due to a firm closure. We investigate whether
the labor market outcomes after a layoff are different for workers who are located in a large labormarket compared to otherwise similar workers located in a small labor market, holding constant
the level of local market tightness. We also test whether labor market size is more important forworkers with a college or master degree compared with workers with lower level of schooling. We
use two alternative measures of labor market size: employment in the Commuting Zone; oremployment in the Commuting Zone-industry pair.
First, we find that displaced workers in large labor market experience significantly shorter
non-employment spells than otherwise identical workers in small markets. The difference isparticularly pronounced for college educated workers. The implied difference in non-employment
duration between large and small markets is economically significant. A college graduate locatedin the commuting zone-industry pair at the 90th percentile of the size distribution has a 13.4
percentage points (or 20.3%) higher probability of finding a new job within 6 months of separationcompared to a college graduate located in the commuting zone-industry pair at the 10th percentileof the size distribution. For high school graduates, the corresponding difference in probability is
8.5 percentage points (or 14.0%). Thus, labor market size provides insurance against idiosyncratic
employment shocks. This insurance is particularly valuable to highly educated workers,presumably because their human capital is more specialized.
Second, conditional on finding a job, the quality of the new match is better in larger
markets. We use three measures of quality: (a) whether the industry of the new employer is a goodfit for the worker college major; (b) whether the displaced worker is reemployed in the sameindustry; whether the new job lasts one year or more. We find that after a firm closure, job seekers
in large markets are significantly more likely to find jobs in industries that are a good fit for theircollege major; to find jobs in their previous industry; and find jobs that last at least one year. The
elasticities of these three measures of match quality with respect to market size are significantly
larger for college graduates compared to high school graduates.
Third, we find that displaced workers in larger market have a lower probability of having
to move to a new commuting zone than displaced workers in smaller markets. Finally, we find thatthe spouses of displaced workers in large markets experience a significantly higher probability of
employment one year after the focal worker’s displacement.
Overall, our evidence is consistent with the existence of self-reinforcing agglomeration
economies stemming from labor pooling. Our findings help explain the existence and growth of
Silicon Valley-style high-tech clusters and, more broadly, the growing attraction of large cities toskilled workers.