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Opportunity to Move: Macroeconomic Effects of Relocation Subsidies

Andrii Parkhomenko

MPRA Paper from University Library of Munich, Germany

Abstract: The unemployment insurance system in the U.S. does not provide incentives to look for jobs outside local labor markets. In this paper I introduce relocation subsidies as a supplement to unemployment benefits, and study their effects on unemployment, productivity and welfare. I build a job search model with heterogeneous workers and multiple locations, in which migration is impeded by moving expenses, cross-location search frictions, borrowing constraints, and utility costs. I calibrate the model to the U.S. economy, and then introduce a subsidy that reimburses a part of the moving expenses to the unemployed and is financed by labor income taxes. During the Great Recession, a relocation subsidy that pays half of the moving expenses would lower unemployment rate by 0.36 percentage points (or 4.8%) and increase productivity by 1%. Importantly, the subsidies cost nothing to the taxpayer: the additional spending on the subsidies is offset by the reduction in spending on unemployment benefits. Unemployment insurance which combines unemployment benefits with relocation subsidies appears to be more effective than the insurance based on the benefits only.

Keywords: unemployment insurance; relocation subsidies and vouchers; local labor markets; moving costs; geographic mobility; internal migration (search for similar items in EconPapers)
JEL-codes: E24 J61 J64 J65 R23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-geo, nep-ias, nep-lab, nep-mac, nep-mig and nep-ure
Date: 2016-11-24
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Persistent link: http://EconPapers.repec.org/RePEc:pra:mprapa:75256

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