Abstract

Large labor markets are thought to enhance productivity by improving the likelihood of matching of workers to firms and increasing the quality of these matches. But despite the importance of this question, the empirical literature is still in its infancy. In this paper, we propose a new measure of the importance of match specificity across occupations. We measure how important it is for a worker’s productivity to be employed at just the right firm. And from firms’ perspective, the importance of finding the right worker to operate the firm’s technology. We find that thicker labor markets, markets with more workers in an occupation, have higher wages. But importantly, we show that agglomeration economies are more beneficial for occupations, where matching is more important, consistent with the theoretical underpinnings of labor pooling and improved matching. Our paper is hence the first paper showing detailed and fine-grained evidence on labor pooling raising wages, and therefore productivity, consistent with the ideas of Marshall 1920.