We isolate the consequences of increased labor market competition on the entire ecosystem of local communities using unique features of the Scandinavian labor market. A shock to labor mobility from Sweden to Norway caused a substantial increase in labor competition for Swedish firms on the border with Norway. Using individual-level register data linked across the two countries, we show that Swedish firms respond by raising worker wages relative to productivity and reducing their workforces. A compositional change in the workforce results in a drop in the average quality of workers, generating a decline in firm value added and a higher risk of firm exit. The negative effects on firms spill over to the local communities, which experience population flight, declining business activity, increased inequality, and changing political sentiments. These effects persist for at least a decade after the initial shock. We conclude that changes to workers’ outside options can have a dramatic and persistent effect on local communities and send ripples across all segments of society, even in countries with automatic stabilizers specifically designed to blunt the impact of local shocks.