Market Integration , Matching , and Wages ¤

When it is costly for agents to ̄nd a match, integrating small markets into a large one increases the matching di±culty. We examine such dependence of the number of matches on the market size by explicitly modelling ̄rms' attempt to attract workers by posting wages. It is shown that integration reduces the relative market power of agents on the much shorter side of the market. Thus, if there are at least as many workers as jobs, integrating markets increases wages; if there are much fewer workers than jobs, integration reduces wages. This is the case even though integration does not change the worker/job ratio in the market. Regardless of the wage response, market integration reduces social welfare when everyone is weighted equally and when other bene ̄ts of integration such as improved match qualities are absent. We characterize the upper bound on the welfare loss from increased matching di±culty and show that the marginal welfare loss shrinks as the market becomes increasingly integrated. JEL classi ̄cations: J60, D40,E24, C72.