This research project considers local labour markets in France and Germany, and examines the causes and consequences of differences in local labour market outcomes. Why do workers’ earnings, firm-worker productivity, and housing costs exhibit such enormous differences between, say, Paris or Mannheim? This research project will systematically and comprehensively examine, in a theory-led empirical investigation using French and German administrative micro-datasets (DADs and LIAB), the roles of each side of the local labour market: the behaviour of firms seeking to harness the gains in productivity stemming from the close proximity of firms in urban centres; the location decision of workers who trade-off wages, employment probabilities, and housing costs; and the interaction of these economic forces that lead to a spatial equilibrium. We then open the “black box” of the firm, and investigate how these forces lead to particular organisation structures, and interact with firms’ trade openness. Moreover, we study in depth the reallocation of workers within regions, focusing on hurdles for adjustment through assortative worker-firm matching. The research project thus provides a comprehensive analysis of externalities in local labour markets. This contributes to a better understanding of spatial multipliers and will enable us to answer a key public policy question: in view of the sometimes substantial disparities between localities in terms of unemployment rates and wage levels, what is an optimal policy response?