Worker Sorting and Agglomeration Economies

This paper argues that larger cities allow workers to find better occupational matches. We introduce a framework where workers are initially uncertain about the quality of their match with each occupation. They can switch occupations within cities at no cost, whereas moving across cities is costly. Larger cities offer workers more options, who in turn become more selective, and, in equilibrium, earn higher wages. Using data from the SIPP, we find support for the setup's implications regarding worker mobility: conditional on wages, workers in metropolitan areas are more likely to switch occupations; they are also less likely to move; the negative effect of metro areas on the moving probability is significantly larger for workers who recently moved there; workers who move and switch occupations experience significant wage gains, whereas moving without occupational switching does not affect wages; workers who move from a metro area continue to earn higher wages in their new location, but only if they do not switch occupations.