Search, sorting, and urban agglomeration

Studies have suggested that urban agglomeration enhances productivity by fa cilitating the firm-worker matching process. This article develops a model that formalizes this notion and demonstrates that, when firm capital and wo rker skill are complementary in production, urban agglomeration will tend t o generate more efficient, yet segregated matches. As a result, not only wi ll local market size be positively associated with average productivity, it will also generate greater between-skill-group wage inequality and a highe r expected return to skill acquisition. Recent data from the counties and m etropolitan areas of the United States is consistent with each of these imp lications.