Two-sided Sorting, Matching and Urban Inequality

Abstract

Persistent earnings disparity across cities is accompanied by co-location of high-skill workers and productive firms. In this paper, I formulate a structural model with two-sided location sorting of heterogeneous workers and firms into cities and matching within cities. Using Canadian Administrative Employer-Employee matched data, I structurally estimate the model and quantify the contribution of each source of heterogeneity on across-city earnings inequality. I highlight that the interdependence of location choices by workers and firms should be considered when implementing place-based subsidies aimed to curb spatial inequality.