Author(s):	Yves Zenou
Publication Date:	December 1999
Keyword(s):	Efficiency Wages, Endogenous Location Of Workers And Firms, Spatial Mismatch, Subsidizing Commuting Costs, Urban Unemployment
JEL(s):	J64, R14
Programme Areas:	Labour Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=2309

We study the role of unemployment in the context of the endogeneous formation of a monocentric city in which firms set efficiency wages to deter shirking. We first show that, in equilibrium, the employed locate at the vicinity of the city-centre, the unemployed reside at the city-edge and firms set up in the city-centre. We then show that there is a `spatial mismatch' between location and jobs because the further away from jobs the unemployed, the larger the level of unemployment. Finally, we derive some policy implications. We show that a policy that improves the city transportation network (by subsidizing the commuting costs of all workers) reduces urban unemployment, increasing utilities of all workers but also raising inequality, whereas a policy that supports the transportation of the unemployed only (by subsidizing their commuting costs) increases urban unemployment, not always raising workers' utilities, but reducing inequality.