This paper tests for the presence of scale effects in markets with search
frictions. It is theoretically plausible that scale effects exist in one or
more aspects of the matching process, but may be offset by the optimal
search strategies of firms and workers, and therefore are not picked up by
reduced-form estimates of the matching function. We estimate a structural
job search model on British data, letting both the arrival rate of job
offers and the mean wage offer vary with personal worker characteristics
and local market size, proxied by the number of existing job openings. We
find evidence of scale effects in the mean wage offer. Such scale effects
turn out to be largely offset by the endogenous response of worker
reservation wages, so that larger markets tend to deliver higher realized
wages rather than a faster exit rate from unemployment.
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