Cities, matching and the productivity gains of agglomeration

The striking geographical concentration of economic activities suggests that there are substantial benefits to agglomeration. However, the nature of those benefits remains unclear. In this paper we take advantage of a new data set to quantify the role of one of the main contenders—the matching of workers and jobs. We show that thicker urban labor markets are associated with more assortative matching in terms of worker and firm quality. When we estimate establishment-level production functions we also find evidence of complementarities between worker and firm quality. Putting together the production and matching relationships, we show that production complementarity and assortative matching is an important source of the urban productivity premium.