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Large Locational Differences in Unemployment Despite High Labor Mobility: Impact of Moving Cost on Aggregate Unemployment and Welfare

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Abstract

In 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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  • Damba Lkhagvasuren, 2009. "Large Locational Differences in Unemployment Despite High Labor Mobility: Impact of Moving Cost on Aggregate Unemployment and Welfare," Working Papers 09009, Concordia University, Department of Economics, revised Mar 2010.
  • Handle: RePEc:crd:wpaper:09009
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    File URL: http://sites.google.com/site/dlkhagva/udif_lkhagvasuren.pdf
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    Cited by:

    1. Karahan, Fatih & Rhee, Serena, 2014. "Population aging, migration spillovers, and the decline in interstate migration," Staff Reports 699, Federal Reserve Bank of New York, revised 01 Apr 2017.
    2. Ludo Visschers & Carlos Carrillo-Tudela, 2011. "Unemployment and Endogenous Reallocation over the Business Cycle," 2011 Meeting Papers 1101, Society for Economic Dynamics.
    3. Plamen Nenov, 2013. "Regional Mismatch and Labor Reallocation in an Equilibrium Model of Migration," 2013 Meeting Papers 565, Society for Economic Dynamics.
    4. Axtell, Robert L. & Guerrero, Omar A. & López, Eduardo, 2016. "The Network Composition of Aggregate Unemployment," MPRA Paper 68962, University Library of Munich, Germany.

    More about this item

    Keywords

    Labor Mobility; Regional Labor Markets; Unemployment; Vacancies; Moving Cost; Island Models; Competitive Search Models;

    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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