Since Marshall (1890), it has been widely held in urban economic theory that cities insure workers against the risk of unemployment by offering a larger pool of potential jobs. Using a large administrative panel data set on workers displaced as a result of plant closures, we examine whether positive effects from a higher urban job density are offset by more intense competition between workers. When controlling for the sorting of workers between regions, we find robust evidence that the effect of job competition on unemployment duration exceeds that of job opportunities in absolute value. Our results put the idea of urban risk-sharing into perspective and provide an explanation for observed longer unemployment durations in cities.
Local returns to scale in the labor market have been notoriously difficult to disentangle from increasing returns in the product market and from the spatial sorting of workers and firms as a source for regional variation in productivity. In this paper we use the introduction of high-speed rail as a natural experiment in order to isolate the impact of labor market size on urban wages from product market and sorting effects. The key idea underlying our identification approach is that high-speed trains reduce commuting times between regions and thereby effectively increase the size of local labor markets without directly affecting product markets. The exact timing of the opening of high-speed rail connections can be regarded as exogenous, as a high-speed rail network is very expensive to build, requires a long planning phase and is mainly the result of political decisions. Furthermore, especially in the second wave of network expansion, several small towns were connected to the high-speed rail network simply because of their location between major metropolitan hubs and in this way got 'lucky' compared to neighboring towns. Drawing on a large and novel panel data set on the introduction of ICE-stations and on connection times between regions in Germany, as well as on a full sample of workers' employment histories, we examine the effect of high-speed trains on commuting behavior and wages. Using case studies, a pooled event study, and gravity equations with instrumental variables and propensity score matching we show that high-speed trains reduce traveling times by sixteen percent on average and significantly raise the number of commuters between local labor markets. We find that commuters incur wage gains of about three percent after the opening of an ICE-station, indicating that improved access to larger urban labor markets is associated with productivity gains for workers living in peripheral regions. In sum, our results suggest that between one third and half of overall agglomeration externalities are rooted in increasing returns to scale in local labor markets.
Tax legislation in virtually all OECD countries foresees tax breaks for commuters. Such commuting allowances are implemented with the aim to raise matching efficiency in the labor market and / or to promote an equalization of net wages for workers independent of the length of their commute. Despite the fiscal magnitude of these subsidies (e.g. in Germany the sum of foregone tax income from commuting tax breaks amounts to 6 billion Euros annually) little is known about their effects on worker and firm behavior. In this paper we use the unexpected repeal of commuting subsidies in Germany between 2007 and 2009, which has affected different groups of workers to a different extent, as a natural experiment. Drawing on a large data set of geo-referenced employer-employee data and applying a difference-in-difference approach, we estimate the effect of commuting subsidies on wages and employment. Beyond the direct effect of the commuting tax break our results allow to draw inference on three key variables in labor economics: wage elasticity of labor supply, bargaining power of workers, and the wage elasticity of locational choice. We find that workers who lose some of their net wage as a result of the reform experience increases in gross wages of .6 per cent. Adjustments in gross wages differ, however, substantially across industries and across educational status, which can be taken as evidence for differential bargaining power across worker groups.
