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Place Based Policies with Unemployment

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  • Patrick Kline
  • Enrico Moretti

Abstract

Many countries have policies aimed at creating jobs in depressed areas with high unemployment rates. In standard spatial equilibrium models with perfectly competitive labor and land markets, local job creation efforts are distortionary. We develop a stylized model of frictional local labor markets with the goal of studying the efficiency of unemployment differences across areas and the potential for place based policies to correct local market failures. Our model builds on the heavily studied Diamond - Mortensen - Pissarides framework, adapted to a local labor market setting with a competitive housing market. The result is a simple search analogue of the classic Roback (1982) model that provides a tractable environment for studying the effects of local job creation efforts. In the model, workers are perfectly mobile and the productivity of worker-firm matches may vary across metropolitan areas. In equilibrium, higher local productivity results in higher nominal wages, higher housing costs, and lower unemployment rates. Although workers can move freely to arbitrage away differences in expected utility across metropolitan areas, equilibrium unemployment rates are not equalized across space. We find that if hiring costs are excessive, firms may post too few vacancies. This problem may be offset via local hiring subsidies of the sort found in many place based policies. The optimal hiring subsidy is city specific in the sense that it depends upon the local productivity level.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18758.

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Date of creation: Feb 2013
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Handle: RePEc:nbr:nberwo:18758

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References

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  1. David Albouy, 2009. "The Unequal Geographic Burden of Federal Taxation," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 635-667, 08.
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  5. Matias Busso & Jesse Gregory & Patrick Kline, 2011. "Assessing the Incidence and Efficiency of a Prominent Place Based Policy," Working Papers 11-07, Center for Economic Studies, U.S. Census Bureau.
  6. Patrick M. Kline & Enrico Moretti, 2013. "Local Economic Development, Agglomeration Economies, and the Big Push: 100 Years of Evidence from the Tennessee Valley Authority," NBER Working Papers 19293, National Bureau of Economic Research, Inc.
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  11. Roback, Jennifer, 1982. "Wages, Rents, and the Quality of Life," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1257-78, December.
  12. Patrick Kline, 2010. "Place Based Policies, Heterogeneity, and Agglomeration," American Economic Review, American Economic Association, vol. 100(2), pages 383-87, May.
  13. David Card & Francesco Devicienti & Agata Maida, 2014. "Rent-sharing, Holdup, and Wages: Evidence from Matched Panel Data," Review of Economic Studies, Oxford University Press, vol. 81(1), pages 84-111.
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Cited by:
  1. Moretti, Enrico & Wilson, Daniel J, 2013. "State Incentives for Innovation, Star Scientists and Jobs: Evidence from Biotech," CEPR Discussion Papers 9594, C.E.P.R. Discussion Papers.
  2. Briant, Anthony & Lafourcade, Miren & Schmutz, Benoît, 2013. "Can Tax Breaks Beat Geography? Lessons from the French Enterprise Zone Experience," CEPREMAP Working Papers (Docweb) 1316, CEPREMAP.
  3. Breinlich, Holger & Ottaviano, Gianmarco & Temple, Jonathan, 2013. "Regional Growth and Regional Decline," CEPR Discussion Papers 9568, C.E.P.R. Discussion Papers.
  4. Vanessa LUTGEN & Bruno VAN DER LINDEN, 2013. "Regional Equilibrium Unemployment Theory at the Age of the Internet," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2013024, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

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