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Efficiency wages and unemployment in cities: The case of high-relocation costs

  • Zenou, Yves

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/regec

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  1. Wasmer, Etienne & Zenou, Yves, 2006. "Equilibrium search unemployment with explicit spatial frictions," Labour Economics, Elsevier, vol. 13(2), pages 143-165, April.
  2. Manning, Alan, 2003. "The real thin theory: monopsony in modern labour markets," Labour Economics, Elsevier, vol. 10(2), pages 105-131, April.
  3. Zenou, Yves, 2002. "How do firms redline workers?," Journal of Urban Economics, Elsevier, vol. 52(3), pages 391-408, November.
  4. Jan K. Brueckner & Yves Zenou, 2003. "Space and Unemployment: The Labor-Market Effects of Spatial Mismatch," Journal of Labor Economics, University of Chicago Press, vol. 21(1), pages 242-262, January.
  5. Zax, Jeffrey S., 1991. "Compensation for commutes in labor and housing markets," Journal of Urban Economics, Elsevier, vol. 30(2), pages 192-207, September.
  6. 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.
  7. 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.
  8. repec:cup:cbooks:9780521346627 is not listed on IDEAS
  9. 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.
  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. Neal, Derek, 1993. "Supervision and Wages across Industries," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 409-17, August.
  12. Madden, Janice Fanning, 1985. "Urban wage gradients: Empirical evidence," Journal of Urban Economics, Elsevier, vol. 18(3), pages 291-301, November.
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