We investigate the role of skill complementarities in production and mobility across cities. The nature of the complementarities determines the equilibrium skill distribution across cities. With extreme-skill complementarity, the skill distribution has thicker tails in large cities; with top-skill complementarity, there is first-order stochastic dominance. Using wage and housing price data, we find robust evidence of thick tails in large cities: large cities disproportionately attract both high-and lowskilled workers, while average skills are constant across city size. This pattern of spatial sorting is consistent with extreme-skill complementarity, where the productivity of high-skilled workers and of the providers of low-skilled services are mutually enhanced. If I can make it there I'll make it anywhere. ðFrank Sinatra, "New York, New York"Þ Rock Bottom, yeah I see you, all my Detroit people. ðEminem, "Welcome 2 Detroit"Þ We are grateful to numerous colleagues for detailed discussion and insightful comments. We also benefited from the feedback of many seminar audiences. Eeckhout gratefully acknowledges support by the European Research Council, grant 208068, and Schmidheiny

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may January, 2013Abstract We investigate the role of complementarities in production and skill mobility across cities. We propose a general equilibrium model of location choice by heterogeneously skilled workers, and consider di↵erent degrees of complementarities between the skills of workers. The nature of the complementarities determines the equilibrium skill distribution across cities. We prove that with extreme-skill complementarity, the skill distribution has fatter tails in large cities; with top-skill complementarity, there is first-order stochastic dominance. Using the model to back out skills from wage and housing price data, we find robust evidence of fat tails in large cities. Big cities have big inequality. This pattern of spatial sorting is consistent with extreme-skill complementarity: the productivity of high skilled workers and of the providers of low skilled services is mutually enhanced.

In this paper, we present a less-explored channel through which health insurance impacts productivity: by o¤ering health insurance, employers reduce the expected time workers spend out of work in sick days. Using data from the Medical Expenditure Panel Survey (MEPS), we show that a worker with health coverage misses on average 52% fewer workdays than uninsured workers, after controlling for endogeneity. We develop a model that embodies this impact of health coverage in productivity. In our model, health insurance reduces the probability that a healthy worker gets sick, missing workdays, and it increases the probability that a sick worker recovers and returns to work. In our model, …rms that o¤er health insurance are larger and pay higher wages in equilibrium, a pattern observed in the data. We calibrated the model using US data for 2004 and show the impact of increases in health costs, as well as of changes in tax bene…ts of health insurance expenses, on labor force health coverage and productivity. Finally, we show that a government mandate that forces …rms to o¤er health insurance increases average wages and aggregate productivity while reducing aggregate pro…ts, ultimately having a positive impact on welfare.

Workers in less secure jobs are often paid less than identical-looking workers in more secure jobs. We show that this lack of compensating differentials for unemployment risk can arise in equilibrium when all workers are identical and firms differ only in job security (i.e. the probability that the worker is not sent into unemployment). In a setting where workers search for new positions both on and off the job, the worker's marginal willingness to pay for job security is endogenous: it depends on the behavior of all firms in the labor market and increases with the rent the employing firm leaves to the worker. We solve for the labor market equilibrium, finding that wages increase with job security for at least all firms in the risky tail of the distribution of firm-level unemployment risk. Meanwhile, unemployment becomes persistent for low-wage and unemployed workers, a seeming pattern of 'unemployment scarring' created entirely by firm heterogeneity. Higher in the wage distribution, workers can take wage cuts to move to more stable employment.

Workers in less secure jobs are often paid less than identical-looking workers in more secure jobs. We show that this lack of compensating differentials for unemployment risk can arise in equilibrium when all workers are identical and firms differ only in job security (i.e. the probability that the worker is not sent into unemployment). In a setting where workers search for new positions both on and off the job, the worker's marginal willingness to pay for job security is endogenous: it depends on the behavior of all firms in the labor market and increases with the rent the employing firm leaves to the worker. We solve for the labor market equilibrium, finding that wages increase with job security for at least all firms in the risky tail of the distribution of firm-level unemployment risk. Meanwhile, unemployment becomes persistent for low-wage and unemployed workers, a seeming pattern of 'unemployment scarring' created entirely by firm heterogeneity. Higher in the wage distribution, workers can take wage cuts to move to more stable employment.