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Economic Diversity and the Resilience of Cities

Institute Working Paper 106 | Revised October 10, 2025

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Authors

François de Soyres Board of Governors of the Federal Reserve System
Simon Fuchs Federal Reserve Bank of Atlanta
Illenin O. Kondo Principal Research Economist, Institute
Helene Maghin Analysis Group
Economic Diversity and the Resilience of Cities

Abstract

We develop a framework to assess how economic shocks affect local labor markets and worker welfare, with a focus on city-level economic diversity. Using detailed worker flow data across cities, sectors, and occupations, we construct theory-consistent welfare measures. Our approach combines a dynamic discrete choice model with a dual representation that captures both direct effects and the insurance value of local economic diversity. Applied to French labor markets, we find that diversification dampens the effect of negative shocks: both job-to-job moves and net inflows decline less in diverse cities than in concentrated ones. Overall, we document sizable welfare insurance gains from local economic diversity.