DP2157 Does Space Affect Search? A Theory of Local Unemployment

Author(s): Etienne Wasmer, Yves Zenou
Publication Date: May 1999
Keyword(s): Equilibrium Unemployment, Local Labour Markets, Matching, Urban Land Use Equilibrium
JEL(s): E24, J41, R14
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2157

The spatial dispersion of economic agents is an immediate determinant of informational imperfections. We investigate how this dispersion creates search frictions and thus rationing. For that, we develop a model of local labour markets in which workers' search efficiency is negatively affected by distance to jobs. Workers' location in a city is endogenous and reflects a trade-off between commuting costs and the surplus associated with search. Different configurations emerge in equilibrium: notably, the unemployed workers may reside far away or close to the jobs. The labour market equilibrium itself depends crucially on these urban equilibria since the aggregate information about economic opportunities depends on the shape of the city. We show that there exists a unique and stable market equilibrium in which both land and labour markets are solved for simultaneously. We then decompose unemployment in two parts: the level reached if all agents were residing in the same location and an additional term due to the spatial dispersion.