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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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Suggested Citation

  • Zenou, Yves, 2006. "Efficiency wages and unemployment in cities: The case of high-relocation costs," Regional Science and Urban Economics, Elsevier, vol. 36(1), pages 49-71, January.
  • Handle: RePEc:eee:regeco:v:36:y:2006:i:1:p:49-71
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    References listed on IDEAS

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    1. Manning, Alan, 2003. "The real thin theory: monopsony in modern labour markets," Labour Economics, Elsevier, vol. 10(2), pages 105-131, April.
    2. Wasmer, Etienne & Zenou, Yves, 2006. "Equilibrium search unemployment with explicit spatial frictions," Labour Economics, Elsevier, vol. 13(2), pages 143-165, April.
    3. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-293, March.
    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. Zenou, Yves, 2002. "How do firms redline workers?," Journal of Urban Economics, Elsevier, vol. 52(3), pages 391-408, November.
    6. Fujita,Masahisa, 1991. "Urban Economic Theory," Cambridge Books, Cambridge University Press, number 9780521396455, January.
    7. 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.
    8. Madden, Janice Fanning, 1985. "Urban wage gradients: Empirical evidence," Journal of Urban Economics, Elsevier, vol. 18(3), pages 291-301, November.
    9. Zax, Jeffrey S., 1991. "Compensation for commutes in labor and housing markets," Journal of Urban Economics, Elsevier, vol. 30(2), pages 192-207, September.
    10. 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.
    11. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    12. Neal, Derek, 1993. "Supervision and Wages across Industries," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 409-417, August.
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    Citations

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    Cited by:

    1. Zenou, Yves, 2007. "Social Interactions and Labour Market Outcomes in Cities," CEPR Discussion Papers 6129, C.E.P.R. Discussion Papers.
    2. Laurent Gobillon & Harris Selod & Yves Zenou, 2007. "The Mechanisms of Spatial Mismatch," Urban Studies, Urban Studies Journal Limited, vol. 44(12), pages 2401-2427, November.
    3. Zenou, Yves, 2003. "Efficiency Wages, Urban Unemployment and Housing Consumption," Working Paper Series 606, Research Institute of Industrial Economics.
    4. Picard, Pierre M. & Zenou, Yves, 2018. "Urban spatial structure, employment and social ties," Journal of Urban Economics, Elsevier, vol. 104(C), pages 77-93.
    5. Gimenez-Nadal, J. Ignacio & Molina, José Alberto & Velilla, Jorge, 2016. "A Wage-Efficiency Spatial Model for US Self-Employed Workers," IZA Discussion Papers 9634, Institute for the Study of Labor (IZA).
    6. Heuermann, Daniel F. & Assmann, Franziska & vom Berge, Philipp & Freund, Florian, 2017. "The distributional effect of commuting subsidies - Evidence from geo-referenced data and a large-scale policy reform," Regional Science and Urban Economics, Elsevier, vol. 67(C), pages 11-24.
    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. José Ignacio Gimenez-Nadal & José Alberto Molina & Jorge Velilla, 2016. "Spatial distribution of US employment in an urban wage-efficiency setting," Boston College Working Papers in Economics 890, Boston College Department of Economics.
    9. Zenou, Yves, 2013. "Spatial versus social mismatch," Journal of Urban Economics, Elsevier, vol. 74(C), pages 113-132.
    10. Ross, Stephen L. & Zenou, Yves, 2008. "Are shirking and leisure substitutable? An empirical test of efficiency wages based on urban economic theory," Regional Science and Urban Economics, Elsevier, vol. 38(5), pages 498-517, September.
    11. 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.
    12. Lehmann, Etienne & Montero Ledezma, Paola L. & Linden, Bruno Van der, 2016. "Workforce location and equilibrium unemployment in a duocentric economy with matching frictions," Journal of Urban Economics, Elsevier, vol. 91(C), pages 26-44.
    13. Zenou, Yves, 2003. "Urban Labour Economic Theory," CEPR Discussion Papers 4029, C.E.P.R. Discussion Papers.
    14. repec:wiw:wiwreg:region_4_3_171 is not listed on IDEAS
    15. Natalia Presman & Arie Arnon, "undated". "Commuting Patterns in Israel," Regional and Urban Modeling 283600076, EcoMod.
    16. Zenou, Yves, 2007. "Why do Black Workers Search Less? A Transport-Mode Based Theory," CEPR Discussion Papers 6155, C.E.P.R. Discussion Papers.
    17. 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).
    18. Vincent Boitier, 2014. "Unemployment Dispersion and City Configurations: Beyond the Bid Rent Theory," Working Papers hal-00999559, HAL.

    More about this item

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns

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