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Spatial Wage Gaps in Frictional Labor Markets

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  • Sebastian Heise
  • Tommaso Porzio

Abstract

We develop a job ladder model with labor reallocation across firms and regions, and estimate it on matched employer-employee data to study the large and persistent real wage gap between East and West Germany. We find that the wage gap is mostly due to firms paying higher wages per efficiency unit in West Germany and quantify a rich set of frictions preventing worker reallocation across space and across firms. We find that three spatial barriers impede East Germans’ ability to migrate West: migration costs, a preference to live in the East, and fewer job opportunities received from the West. The estimated model highlights that the spatial barriers needed to generate the large wage gap between East and West are small relative to the frictions preventing the reallocation of labor across firms. Therefore, policies that directly promote regional integration lead to smaller aggregate benefits than equally costly hiring subsidies within region.

Suggested Citation

  • Sebastian Heise & Tommaso Porzio, 2019. "Spatial Wage Gaps in Frictional Labor Markets," Opportunity and Inclusive Growth Institute Working Papers 29, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmoi:87578
    DOI: 10.21034/iwp.29
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    References listed on IDEAS

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    Cited by:

    1. Busch, Christopher & Krueger, Dirk & Ludwig, Alexander & Popova, Irina & Iftikhar, Zainab, 2020. "Should Germany have built a new wall? Macroeconomic lessons from the 2015-18 refugee wave," Journal of Monetary Economics, Elsevier, vol. 113(C), pages 28-55.
    2. Hao, Tongtong & Sun, Ruiqi & Tombe, Trevor & Zhu, Xiaodong, 2020. "The effect of migration policy on growth, structural change, and regional inequality in China," Journal of Monetary Economics, Elsevier, vol. 113(C), pages 112-134.
    3. Morchio, Iacopo & Moser, Christian, 2018. "The Gender Pay Gap: Micro Sources and Macro Consequences," MPRA Paper 99276, University Library of Munich, Germany, revised 24 Mar 2020.
    4. Emmler, Julian & Fitzenberger, Bernd, 2020. "The Role of Unemployment and Job Change When Estimating the Returns to Migration," IZA Discussion Papers 13740, Institute of Labor Economics (IZA).
    5. Moser, Christian & Saidi, Farzad & Wirth, Benjamin & Wolter, Stefanie, 2020. "Credit Supply, Firms, and Earnings Inequality," MPRA Paper 100371, University Library of Munich, Germany.

    More about this item

    Keywords

    Labor mobility; Regional integration; Spatial wage gaps;

    JEL classification:

    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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