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ABSTRACT: Unemployment rates differ widely across local labor markets. I offer new empirical evidence that high local unemployment emerges primarily because of elevated local job losing rates, even for observationally identical workers. I then propose a theory in which spatial differences in job loss arise endogenously. Highly productive employers prefer to fill vacancies rapidly, as waiting implies foregoing high profits. Therefore, they sort into high wage locations with few vacancies per job seeker while less productive employers sort into tight labor markets with low wages. Jobs at more productive employers are endogenously more stable, and spatial gaps in job losing rates arise. In contrast, the equilibrium response of reservation wages results in flatter job finding rates across locations. Due to labor market frictions, productive employers over-value locating close to each other. Thus, the optimal policy incentivizes productive employers to relocate to areas with high job losing rates, providing a rationale for commonly used place-based policies. After structurally estimating the model on French administrative data, I show that it accounts for over 90% of the cross-sectional dispersion in unemployment rates, as well as for the respective contributions of job losing and job finding rates. Employers’ inefficient location choices amplify spatial unemployment differentials five-fold. Finally, I show that both real-world and optimal place-based policies yield sizable welfare gains at the local and aggregate level.
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