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Abstract: This handbook chapter studies the theoretical microfoundations of urban agglomeration economies. We distinguish three types of micro-foundations, based on sharing, matching, and learning mechanisms. For each of these three categories, we develop one or more core models in detail and discuss the literature in relation to those models. This allows us to give a precise characterisation of some of the main theoretical underpinnings of urban agglomeration economies, to discuss modelling issues that arise when working with these tools, and to compare different sources of agglomeration economies in terms of the aggregate urban outcomes they produce as well as in terms of their normative implications. Key words: cities, agglomeration, increasing returns, micro-foundations jel classification: r12, r13, r32 ∗ This is a working draft of a chapter written for eventual publication in the Handbook of Regional and Urban Economics, Volume 4, edited by J. Vernon Henderson and Jacques-François Thisse, to be published by North-Holland. We are grateful to the editors, Masa Fujita, Mike Peters, and the participants at the the 2002 narsa meetings for comments and suggestions.

During the time this study was conducted, Zamora and Rathelot were working at the DARES, the research unit of the employment ministry, which funded this study. At the time of submission, they were employed by CREST, an autonomous public research agency since January 2011. We would like to Joshua Angrist, Amy Finkelstein, Larry Katz, Emmanuel Saez, as well as four anonymous referees and many seminar participants for very useful comments. We thank Ben Feigenberg and Vestal McIntyre for carefully reading and editing the paper. The DARES (French Ministry of Labor) provided access to data and financial support for this study. Any opinions expressed here are those of the authors and not of any institution or government entity. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

The United States continues to run an international trade surplusin services, but business stories frequently appear about service-sector jobs moving offshore. Many Americans are particularly concerned about the loss of skilled, well-paid jobs in such fields as com-puter programming and accounting. These jobs seemed relatively secure at a time when many manufacturing jobs were being lost to import competition. Similarly, telephone call centers, once viewed as an eco-nomic development opportunity in some areas, increasingly are moving to low-wage countries, such as India and the Philippines. Reflecting this growing concern, some members of Congress and state legislators have focused attention on the offshoring of service jobs and production, even introducing legislation to limit the outsourcing of jobs to other countries. Offshoring raises many questions for policymakers and the general public. For example, which service jobs will be affected most by import competition? What are the most likely effects of service-sector off-shoring on U.S. output, employment, and, most important, our

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Unemployment inflows fell from 4 percent of employment per month in the early 1980s to 2 percent or less by the mid 1990s and thereafter. U.S. data also show a secular decline in firm-level employment volatility and the job destruction rate. We interpret this decline as a decrease in the intensity of idiosyncratic labor demand shocks, a key parameter in search and matching models of frictional unemployment. According to these models, a lower intensity of idiosyncratic demand shocks produces less job destruction, fewer workers flowing through the unemployment pool and less frictional unemployment. To evaluate this theoretical mechanism, we relate industry-level unemployment flows from 1977 to 2005 to industry-level indicators for the intensity of idiosyncratic shocks. Unlike previous research, we focus on the lower frequency relationship of job destruction and business volatility to unemployment flows. We find strong evidence that declines in the intensity of idiosyncratic labor demand shocks drove large declines in the incidence of unemployment.

Can the reallocation of factors of production among firms and sectors, or the restructuring of production technology, cause business cycle fluctuations? Theoretically, the answer is unequivocally “yes. ” But do reallocation and restructuring actually cause fluctuations? The answer to this question—like most questions about economic causality—is much less clear. Indeed, determining whether or not reallocation and restructuring cause fluctuations is as fundamentally difficult as identifying supply and demand. The purpose of this paper is to examine the relationship between the business cycle and reallocation and restructuring, with a particular emphasis on trying to learn whether reallocation causes recessions. We conduct our investigation by briefly assessing existing evidence and theories of reallocation and restructuring, and then providing new evidence designed to improve our understanding of the relationship. Held a generation ago, this conference probably would not have included a session devoted to understanding the role of reallocation and restructuring (henceforth, simply “reallocation”) in business cycle fluctu-

The matching function has become a popular tool in labor economics. It relates job creation—a flow variable—to two stock variables: vacancies and job searchers. In most studies the matching function is exogenous and assumed to fulfill certain properties. This study looks at the properties of an endogenous matching function. For that purpose we program an agent-based-computational labor market model with endogenous job creation and endogenous job search behavior. Our simulations suggest that the endogenous matching technology is subject to decreasing returns to scale. The Beveridge curve reveals substitutability of job searchers and vacancies for a small range of inputs but is flat for relatively high numbers of job searchers and vertical for relatively high numbers of vacancies. Also it occurs that the matching technology changes with labor market policies. This raises concerns about the validity of labor market policy evaluations conducted with flow models of the labor market employing exogenous matching functions.

Abstract We estimate outflow equations for vacancies and unemployed workers in Britain, departing from the stock-based analysis of matching in two ways. First, we deal with the temporal aggregation problem that arises when discrete time data are used to describe continuous time processes. Second, we allow for a stock-flow matching mechanism in which the stock of traders on one side of the market matches with the flow of traders on the other side. Our estimates are in line with the predictions of stock-flow matching in terms of higher exit rates of flows and of matching combinations between labor market stocks and flows. Furthermore, employer search effectiveness did not seem to decline between the 1960s and the 1990s. Nevertheless, some deterioration in worker search effectiveness is detected, however less severe than that implied under the assumption of random matching. Keywords: temporal aggregation, stock-flow matching, matching effectiveness. JEL-Codes: J63,J64 * We thank Manuel Arellano, Melvyn Coles, Juan Dolado, Andrew Hildreth, Alan Manning, Costas Meghir, Claudio Michelacci, Chris Pissarides, Jonathan Wadsworth and three anonymous referees for very useful comments. The Leverhulme Trust and the Compagnia di San Paolo are gratefully acknowledged for financial support.