Job Turnover, Risk Sharing,and Regional Wages in WesternGermany

We test Krugman’s (1991) notion of risk sharing in pooled labormarkets as one of the micro-foundations of agglomerationeconomies, i.e. we examine whether firms share risks fromidiosyncratic and sector specific shocks through labor pooling.Estimating wage functions we find that job turnover depresseswages at the regional and the firm level, indicating that firmsincur significant adjustment costs when experiencingproductivity shocks. On the regional level, industrialspecialization and diversification mitigate wage depressingeffects of different types of employment shocks.[...]