The Geography of Worker - Firm Sorting

Using social security data and an AKM wage decomposition, this paper examines spatial wage inequality in West Germany. Spatial inequality in log wages rose sharply between 1998 and 2008, driven largely by stronger positive spatial assortative matching between workers and establishments, i.e., colocation. Changes in establishment wage premia were largely unrelated to rising colocation, while labor mobility reduced it. Instead, growth in worker pay premia among stayers was concentrated in regions that already had many high-wage workers and establishments, amplifying pre-existing patterns and leading to “colocation without relocation.” Germany’s rising trade surplus raised stayers’ pay premia in precisely these regions and quantitatively accounts for the observed increase in colocation, pointing to trade as an important mechanism.