The proximity of industries is strongly related to inter-industry labor mobility, and there is some evidence that workers who move to closely similar industries receive higher wages. Knowledge is transmitted more easily when industries operate, and workers work, in close physical proximity.Do flexible labor markets lubricate growth? Using data from Taiwan, China, to analyze the effects of labor market flexibility, Pack and Paxson find that:- Workers are more likely to move to industries that tend to be similar to their industry of origin (including intrasectoral moves that would be considered intersectoral if there were more sectoral disaggregation). The degree of similarity between two industries is measured in several ways, all of them based on the input-output flows across industries. Workers are more likely to move from industry i to industry j if i supplies a large share of j's inputs, receives a large share of its inputs from j, or uses many of the same inputs.- Moves to more similar industries produce larger wage gains. This is especially true when the industries' similarity is based on their using many of the same inputs. This may be partly because the close proximity of industries, occupations, and individuals provides an environment in which ideas flow quickly from person to person.- Gains are more likely to accrue to industries as a result of labor mobility.This paper - a product of Public Economics, Development Research Group - is part of a larger effort in the group to analyze the potential need for public support of industrial development. Howard Pack may be contacted at [email protected].