DP1870 Local Unemployment and Specialization

Author(s): Peer Ritter, Uwe Walz
Publication Date: April 1998
Keyword(s): Efficiency Wages, local unemployment, Specialization and heterogeneity of labour
JEL(s): J21, J41, R23
Programme Areas: Human Resources
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1870

Recent empirical work has shown that there exists a negative relation between wages and unemployment estimated across regions. Our model recognizes the spatial dimension of the so-called wage-curve by using a Hotelling/Salop framework in which a finite number of firms compete for heterogeneous workers. We incorporate this set-up into an efficiency-wage framework. In setting wages, firms perceive their influence on the wage-unemployment trade-off, thus taking the employment decisions of their competitors as an externality. The model predicts that in larger regions, with firms demanding more specialized labour, workers receive higher wages and face lower unemployment.