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.