Everybody needs good neighbors? Labor mobility costs, cities and matching

•We propose an assignment model with a continuum of job and worker types, allowing for inter-regional labor mobility.•The labor mobility costs induce only the high-skilled workers in the suburbs to commute to the central district.•Low-skilled workers in the suburbs continue to search jobs locally.•High-skilled workers benefit from the proximity to the central district.•Low-skilled workers in the suburbs suffer from being close to the central district.

We develop an assignment model for a city with central and suburban labor markets connected by commuting. We show that not all workers benefit from the agglomeration economies created by the dense central business district. Low-skilled workers in the suburban district are worse off by being close to the dense central business district. High-skilled workers gain more from the urban scale. The existence of labor mobility costs induces only high-skilled workers in the suburbs to commute to the central business district, which results in a decrease in the local contact efficiency for the left-behind low-skilled workers. The empirical evidence from a Belgian linked employer–employee dataset confirms this novel finding.