Location Effects or Sorting? Evidence from Firm Relocation

Abstract

Why are wages in cities like New York or Paris higher than in others? This paper uses firm mobility to separate the role of “location effects” (e.g., local geography, infrastructure, and agglomeration) from the spatial sorting of workers and firms. Using French administrative records and U.S. commercial data, we first document that firm mobility is widespread: 4% of establishments relocate annually. Establishments retain their main activity and structure as they move, but adjust their workforce and wages. Combining firm and worker mobility, we then decompose wage disparities across French commuting zones. We find that spatial wage differences are largely driven by the sorting and co-location of workers and firms: location effects account for only 2–5% of disparities, while differences in the composition of workers and establishments account for around 30% and 15%, respectively. The remaining half is accounted for by the co-location of high-wage workers and firms, especially in cities with high location effects. Revisiting the elasticity of local wages to population density, we find a significant coefficient of 0.007—two to three times lower than estimates not controlling for firm composition.