Matching and Local Labor Market Size in Mexico (Resubmitted, Regional Science and Urban Economics)

With Jorge Meléndez and José G. Nuño Ledesma

Abstract: We explore how the size of local labor markets (LLM) influences the quality of matching between workers and firms in Mexico. Using a matched employer-employee dataset comprising over 80\% of all formal workers in the country, we estimate models of log wages with additive worker and workplace fixed effects, which we leverage to construct a measure of assortative matching. We find evidence of positive assortative matching between workers and firms at the aggregate level. Specifically, highly productive workers, characterized by high worker fixed effects, tend to be employed by companies with high firm fixed effects. We then correlate our matching metric to the size of LLMs. We find a positive impact of LLM size on matching in Mexico. Doubling a local labor market size increases the correlation of worker and firm fixed effects by four to seven percentage points. We also find that labor informality reduces both the strength of assortative matching and its connection to labor market size. In markets with high informality, we observe that, on average, assortative matching is negative, meaning that high-wage workers tend to work at low-wage firms. Furthermore, larger markets do not yield better worker-firm matching.