Events

Mr. Guangbin Hong
Ph.D. Candidate in Economics
Department of Economics
University of Toronto

High-skilled workers and high-productivity firms co-locate in large cities. In this paper, I study how
the two-sided sorting of workers and firms affects spatial earnings inequality, efficiency of the allocation
of workers and firms across cities, and the welfare consequences of place-based policies. I build a general
equilibrium model in which heterogeneous workers and firms sort across cities and match within cities.
I structurally estimate the model using Canadian matched employer-employee data and decompose
the urban earnings premium, finding that worker and firm sorting account for 67% and 27% of this
premium, respectively. The decentralized equilibrium is inefficient as low-productivity firms overvalue
locating in high-skilled cities. The optimal spatial policy would incentivize high-skilled workers and
high-productivity firms to co-locate to a greater extent while redistributing income towards low-earning
cities, leading to a 6% increase in social welfare. Model counterfactuals underscore the importance of
two-sided sorting when evaluating distributional and aggregate outcomes of place-based policies.