Labor market size and occupational skill match

Individuals working in larger labor markets tend to earn more than those working in smaller labor markets, but the reason for this is still unclear. This paper studies whether larger cities provide better occupational skill matches by combining machine learning techniques with data on individuals’ productive skills matched with employer data to construct a novel measure of match quality. I show that occupational skill-match quality is higher for individuals living in large local labor markets. Conditional on skills, differences in match quality explain around 30 percent of the city-size wage gap. The higher match quality in larger labor markets is related to a more diversified occupation structure and more learning possibilities in these markets.