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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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4058.

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Date of creation: Sep 2003
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Handle: RePEc:cpr:ceprdp:4058

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Keywords: location-dependent wages; relocation costs; urban labour markets;

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  1. 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.
  2. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, Econometric Society, vol. 56(2), pages 259-93, March.
  3. Zenou, Yves, 2002. "How do firms redline workers?," Journal of Urban Economics, Elsevier, vol. 52(3), pages 391-408, November.
  4. Manning, Alan, 2003. "The real thin theory: monopsony in modern labour markets," Labour Economics, Elsevier, vol. 10(2), pages 105-131, April.
  5. Fujita,Masahisa, 1991. "Urban Economic Theory," Cambridge Books, Cambridge University Press, number 9780521396455, 9.
  6. Wasmer, Etienne & Zenou, Yves, 2004. "Equilibrium Search Unemployment With Explicit Spatial Frictions," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4743, C.E.P.R. Discussion Papers.
  7. Madden, Janice Fanning, 1985. "Urban wage gradients: Empirical evidence," Journal of Urban Economics, Elsevier, vol. 18(3), pages 291-301, November.
  8. Jan K. Brueckner & Yves Zenou, 2003. "Space and Unemployment: The Labor-Market Effects of Spatial Mismatch," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 21(1), pages 242-262, January.
  9. 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.
  10. Neal, Derek, 1993. "Supervision and Wages across Industries," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 409-17, August.
  11. Zax, Jeffrey S., 1991. "Compensation for commutes in labor and housing markets," Journal of Urban Economics, Elsevier, vol. 30(2), pages 192-207, September.
  12. 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.
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Cited by:
  1. GOBILLON Laurent & SELOD Harris & ZENOU Yves, 2007. "The mechanisms of spatial mismatch," Research Unit Working Papers, Laboratoire d'Economie Appliquee, INRA 0701, Laboratoire d'Economie Appliquee, INRA.
  2. Zenou, Yves, 2008. "Social Interactions and Labor Market Outcomes in Cities," IZA Discussion Papers 3283, Institute for the Study of Labor (IZA).
  3. Zenou, Yves, 2003. "Efficiency Wages, Urban Unemployment and Housing Consumption," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4153, C.E.P.R. Discussion Papers.
  4. 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).
  5. Zenou, Yves, 2007. "Why do Black Workers Search Less? A Transport-Mode Based Theory," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6155, C.E.P.R. Discussion Papers.
  6. 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).
  7. Nicolaas Groenewold & Alfred J. Hagger, 2009. "The Regional Economic Effects of Immigration," Economics Discussion / Working Papers 09-07, The University of Western Australia, Department of Economics.
  8. 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.
  9. Zenou, Yves, 2003. "Urban Labour Economic Theory," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4029, C.E.P.R. Discussion Papers.
  10. Vincent Boitier, 2014. "Unemployment Dispersion and City Configurations: Beyond the Bid Rent Theory," Working Papers hal-00999559, HAL.

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