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Using German administrative data, we document that high-wage locations have lower labor shares
and higher wage dispersion. We show that a parsimonious model, in which firm monopsony power stems
from search frictions, can explain these facts if "superstar" firms sort into productive locations. This
positive sorting, which emerges under sufficiently strong firm–location complementarity or large frictions,
steepens local wage ladders and raises wages and wage inequality. Moreover, sorting reduces labor shares
because more productive firms have more monopsony power. Our estimates indicate that firm sorting
rationalizes lower local labor shares in high-wage locations and 40% of their increased wage dispersion.
