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Efficiency wages and unemployment in cities: The case of high-relocation costs

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  • Zenou, Yves

Abstract

We develop an urban model in which all jobs are located in the Central Business District (CBD) and workers, who have high relocation costs, optimally choose their residence between the CBD and the city-fringe. We consider two cases. In the first one, firms can pay different wages according to residential location (this is referred to as the unconstrained equilibrium) while in the second case, there is a legal constraint that prevents firms to wage-discriminate on the basis of residential location (this is referred to as the constrained equilibrium). We show that in the unconstrained equilibrium, the efficiency wage in fact increases with distance to jobs. We also demonstrate that both workers and firms are better off in the unconstrained equilibrium. Finally, we show that a policy that reduces the unemployment benefit decreases unemployment but, interestingly, has an ambiguous effect on utilities in both equilibria. Moreover, this policy has no impact on the land rent in the unconstrained equilibrium but increases the competition in the land market in the constrained equilibrium.

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Bibliographic Info

Article provided by Elsevier in its journal Regional Science and Urban Economics.

Volume (Year): 36 (2006)
Issue (Month): 1 (January)
Pages: 49-71

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Handle: RePEc:eee:regeco:v:36:y:2006:i:1:p:49-71

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References

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  1. Zax, Jeffrey S., 1991. "Compensation for commutes in labor and housing markets," Journal of Urban Economics, Elsevier, vol. 30(2), pages 192-207, September.
  2. Neal, Derek, 1993. "Supervision and Wages across Industries," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 409-17, August.
  3. Wasmer, Etienne & Zenou, Yves, 2004. "Equilibrium Search Unemployment with Explicit Spatial Frictions," Working Paper Series 615, Research Institute of Industrial Economics.
  4. Zenou, Yves, 2002. "How do Firms Redline Workers?," CEPR Discussion Papers 3209, C.E.P.R. Discussion Papers.
  5. Albrecht, James W. & Vroman, Susan B., 1996. "A note on the long-run properties of the shirking model," Labour Economics, Elsevier, vol. 3(2), pages 189-195, September.
  6. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  7. Fujita,Masahisa, 1989. "Urban Economic Theory," Cambridge Books, Cambridge University Press, number 9780521346627, October.
  8. Manning, Alan, 2003. "The real thin theory: monopsony in modern labour markets," Labour Economics, Elsevier, vol. 10(2), pages 105-131, April.
  9. Zenou, Yves & Smith, Tony E., 1995. "Efficiency wages, involuntary unemployment and urban spatial structure," Regional Science and Urban Economics, Elsevier, vol. 25(4), pages 547-573, August.
  10. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March.
  11. Jan K. Brueckner & Yves Zenou, 2003. "Space and Unemployment: The Labor-Market Effects of Spatial Mismatch," Journal of Labor Economics, University of Chicago Press, vol. 21(1), pages 242-262, January.
  12. Madden, Janice Fanning, 1985. "Urban wage gradients: Empirical evidence," Journal of Urban Economics, Elsevier, vol. 18(3), pages 291-301, November.
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Citations

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Cited by:
  1. Zenou, Yves, 2008. "Social Interactions and Labor Market Outcomes in Cities," IZA Discussion Papers 3283, Institute for the Study of Labor (IZA).
  2. Zenou, Yves, 2007. "Why do Black Workers Search Less? A Transport-Mode Based Theory," CEPR Discussion Papers 6155, C.E.P.R. Discussion Papers.
  3. Zenou, Yves, 2009. "Urban search models under high-relocation costs. Theory and application to spatial mismatch," Labour Economics, Elsevier, vol. 16(5), pages 534-546, October.
  4. Zenou, Yves, 2003. "Urban Labour Economic Theory," CEPR Discussion Papers 4029, C.E.P.R. Discussion Papers.
  5. Laurent Gobillon & Harris Selod & Yves Zenou, 2005. "The mechanisms of spatial mismatch," Research Unit Working Papers 0510, Laboratoire d'Economie Appliquee, INRA.
  6. Zenou, Yves, 2003. "Efficiency Wages, Urban Unemployment and Housing Consumption," CEPR Discussion Papers 4153, C.E.P.R. Discussion Papers.
  7. Ross, Stephen L. & Zenou, Yves, 2008. "Are Shirking and Leisure Substitutable? An Empirical Test of Efficiency Wages based on Urban Economic Theory," CEPR Discussion Papers 6841, C.E.P.R. Discussion Papers.
  8. Vincent Boitier, 2014. "Unemployment Dispersion and City Configurations: Beyond the Bid Rent Theory," Working Papers hal-00999559, HAL.
  9. Zenou, Yves, 2007. "High Relocation Costs in Search-Matching Models: Theory and Application to Spatial Mismatch," IZA Discussion Papers 2739, Institute for the Study of Labor (IZA).

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