Large Locational Differences in Unemployment Despite High Labor Mobility: Impact of Moving Cost on Aggregate Unemployment and Welfare
AbstractIn the U.S., the cross-state differences in unemployment rates are large - for instance, large compared to variations in the national unemployment rate over time. At the same time, there is considerable labor mobility within the U.S.; in fact, enough that, if migration arbitrages differences in unemployment, one might expect very low cross-state differences in unemployment. This paper develops a multi-sector equilibrium model that can account for high cross-state mobility and large variability in unemployment rates across states. The model allows for explicit treatment of net and gross mobility across local labor markets and within-market job search frictions. The prediction of the model is consistent with procyclicality of gross mobility in the U.S.. The model generates a striking result: that unemployment is a U-shaped function of moving cost. However, evaluated at moving costs which are empirically relevant, a marginal decrease in the moving cost reduces aggregate unemployment. Using the model, several policy experiments are conducted. These show that the government can reduce aggregate unemployment substantially by subsidizing workers' moving expenses. Such policy is welfare-improving despite being financed by taxes imposed on workers. The model also provides insights into the impacts of homeownership, city size, and an aging population on aggregate unemployment.
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Bibliographic InfoPaper provided by Concordia University, Department of Economics in its series Working Papers with number 09009.
Length: 5 pages
Date of creation: Jul 2009
Date of revision: Mar 2010
Labor Mobility; Regional Labor Markets; Unemployment; Vacancies; Moving Cost; Island Models; Competitive Search Models;
Find related papers by JEL classification:
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
- J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
- R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
- R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
- R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
- R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy
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