Space, Search and Efficiency

33 Pages Posted: 21 Nov 2000

See all articles by Etienne Wasmer

Etienne Wasmer

New York University (NYU) - New York University, Abu Dhabi; Centre for Economic Policy Research (CEPR)

Yves Zenou

Stockholm University; Monash University - Department of Economics; Research Institute of Industrial Economics (IUI); IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Date Written: August 2000

Abstract

We investigate the role of spatial frictions in search equilibrium unemployment. For that, we develop a model of the labor market in which workers' location in an agglomeration depends on commuting costs, the endogenous price of land and the value of job search and employment. We first show that there exists a unique and stable market equilibrium in which both land and labor markets are solved for simultaneously. We then compare this decentralized equilibrium to a social planner's optimum and we find that distortions (subventions or imperfect competition in the transport market) modify the usual Hosios efficiency condition. Indeed, the social planner needs to adjust the transportation spending of the decentralized equilibrium. Given differences in commuting costs between the employed and the unemployed, this is realized by a change in the fraction of unemployed workers: the socially optimal number of unemployed workers depends both of matching externalities and on distortions in the transport market. In absence of these distortions and despite spatial terms in wages, the standard condition holds: a spatial efficient equilibrium may thus occur. We however show that space has still an important role on the interaction between land and labor markets, and decompose the equilibrium unemployment rate into two parts: a pure non-spatial one (which corresponds to the standard matching model) and a mixed of non-spatial and spatial elements, the first element amplifying the other one.

Keywords: Local labor markets, job access, job matching, welfare

JEL Classification: E24, J41, R14

Suggested Citation

Wasmer, Etienne and Zenou, Yves and Zenou, Yves, Space, Search and Efficiency (August 2000). Available at SSRN: https://ssrn.com/abstract=250748 or http://dx.doi.org/10.2139/ssrn.250748

Etienne Wasmer (Contact Author)

New York University (NYU) - New York University, Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Yves Zenou

Monash University - Department of Economics ( email )

Australia

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Research Institute of Industrial Economics (IUI) ( email )

P.O. Box 5501
S-114 85 Stockholm
Sweden

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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