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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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  1. Fujita,Masahisa, 1989. "Urban Economic Theory," Cambridge Books, Cambridge University Press, number 9780521346627.
  2. Wasmer, Etienne & Zenou, Yves, 2005. "Equilibrium Search Unemployment with Explicit Spatial Frictions," IZA Discussion Papers 1465, Institute for the Study of Labor (IZA).
  3. Alan Manning, 2003. "The Real Thin Theory: Monopsony in Modern Labour Markets," CEP Discussion Papers dp0564, Centre for Economic Performance, LSE.
  4. Zenou, Yves, 2002. "How do firms redline workers?," Journal of Urban Economics, Elsevier, vol. 52(3), pages 391-408, November.
  5. Brueckner, Jan & Zenou, Yves, 2000. "Space And Unemployment: The Labour-Market Effects Of Spatial Mismatch," CEPR Discussion Papers 2397, C.E.P.R. Discussion Papers.
  6. 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.
  7. Madden, Janice Fanning, 1985. "Urban wage gradients: Empirical evidence," Journal of Urban Economics, Elsevier, vol. 18(3), pages 291-301, November.
  8. 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.
  9. Zax, Jeffrey S., 1991. "Compensation for commutes in labor and housing markets," Journal of Urban Economics, Elsevier, vol. 30(2), pages 192-207, September.
  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. 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.
  12. Neal, Derek, 1993. "Supervision and Wages across Industries," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 409-17, August.
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Cited by:
  1. Zenou, Yves, 2003. "Efficiency Wages, Urban Unemployment and Housing Consumption," Working Paper Series 606, Research Institute of Industrial Economics.
  2. Ross, Stephen L. & Zenou, Yves, 2007. "Are Shirking and Leisure Substitutable? An Empirical Test of Efficiency Wages Based on Urban Economic Theory," IZA Discussion Papers 2601, Institute for the Study of Labor (IZA).
  3. Zenou, Yves, 2003. "Urban Labour Economic Theory," CEPR Discussion Papers 4029, C.E.P.R. Discussion Papers.
  4. Laurent Gobillon & Harris Selod & Yves Zenou, 2005. "The mechanisms of spatial mismatch," Research Unit Working Papers 0510, Laboratoire d'Economie Appliquee, INRA.
  5. Zenou, Yves, 2008. "Social Interactions and Labor Market Outcomes in Cities," IZA Discussion Papers 3283, Institute for the Study of Labor (IZA).
  6. Vincent Boitier, 2014. "Unemployment Dispersion and City Configurations: Beyond the Bid Rent Theory," Working Papers hal-00999559, HAL.
  7. Zenou, Yves, 2007. "Why do Black Workers Search Less? A Transport-Mode Based Theory," CEPR Discussion Papers 6155, C.E.P.R. Discussion Papers.
  8. 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).
  9. 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.

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