How does the COVID-19 pandemic affect regional labour markets and why do large cities suffer most?

We estimate spatially heterogeneous effects of the COVID-19 pandemic on labour market dynamics in Germany until December 2021. While initially slightly larger in rural regions, adverse effects quickly become more pronounced and persistent in large agglomerations. We ascribe the larger impact of the pandemic in large agglomerations to two factors. First, a combination of a higher share of skilled workers and jobs suitable for working-from-home is positively related to an increased inflow rate into unemployment. We argue that spillover effects from reduced product market demand in large cities caused by changes in behaviour such as working-fromhome or online shopping are a possible explanation. Second, a higher pre-crisis unemployment rate in large agglomerations is associated with a lower outflow rate out of unemployment. This might reflect the less favourable composition of unemployment in large cities which reduces the probability of transitions into employment during crises.