We study the role of unemployment in the context of the endogeneous formation of a monocentric city in which firms set efficiency wages to deter shirking. We first show that, in equilibrium, the employed locate at the vicinity of the city-centre, the unemployed reside at the city-edge and firms set up in the city-centre. We then show that there is a `spatial mismatch' between location and jobs because the further away from jobs the unemployed, the larger the level of unemployment. Finally, we derive some policy implications. We show that a policy that improves the city transportation network (by subsidizing the commuting costs of all workers) reduces urban unemployment, increasing utilities of all workers but also raising inequality, whereas a policy that supports the transportation of the unemployed only (by subsidizing their commuting costs) increases urban unemployment, not always raising workers' utilities, but reducing inequality.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
2309.
Find related papers by JEL classification: J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search R14 - Urban, Rural, and Regional Economics - - General Regional Economics - - - Land Use Patterns
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