Wage Rigidities in a Quantitative Spatial Economy: Commuting and Local Unemployment

Nathan Lachapelle () and Francesco Pascucci ()
Additional contact information
Nathan Lachapelle: UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)
Francesco Pascucci: UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)

No 2021027, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: In this paper we build a quantitative spatial general equilibrium model to study the geographical variation in unemployment rates in the presence of wage rigidities and when workers are allowed to commute from residence to workplace. Calibrating the model on Belgian district data, we find that, were workers' location choice driven only by preferences for amenities, workers would relocate away from the center of the country, generating a less concentrated spatial distribution of economic activity. We also explore the role of unemployment insurance in determining the location choices of workers. We find that when the risk of unemployment is fully insured, workers relocate to districts with initially high unemployment rates, therefore accentuating the spatial misallocation of labor. Removing unemployment insurance would instead not generate significant changes in the spatial distribution of workers. To gauge the magnitude of wage distortions, we compare the observed gross wage levels with the counterfactual market-clearing wages. Removing wage rigidities would generate significant gains in local and total GDP (+3%) and modest gains in the average real net labor income per resident (+1%). Lastly, we determine the level of the employers' social contribution rate that would allow to achieve full employment in all districts. We find that the optimal social contribution rate should be 24%, 12 percentage points lower than the observed rate, while at the same time it would increase fiscal revenue by 1.5%.

Keywords: wage regulation; spatial equilibrium; labor mobility; commuting; local unemployment. (search for similar items in EconPapers)
JEL-codes: J3 J5 J61 R12 R23 (search for similar items in EconPapers)
Date: 2021-12-09
New Economics Papers: this item is included in nep-geo, nep-ias, nep-lab and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://sites.uclouvain.be/econ/DP/IRES/2021027(02).pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2021027

Access Statistics for this paper

More papers in LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) Place Montesquieu 3, 1348 Louvain-la-Neuve (Belgium). Contact information at EDIRC.
Bibliographic data for series maintained by Virginie LEBLANC ().