Spatial Wage Gaps in Frictional Labor Markets

Tommaso Porzio and Sebastian Heise

No 14197, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop a job ladder model with labor reallocation across firms and regions, and estimate it on matched employer-employee data to study the large and persistent real wage gap between East and West Germany. We find that the wage gap is mostly due to firms paying higher wages per efficiency unit in West Germany and quantify a rich set of frictions preventing worker reallocation across space and across firms. We find that three spatial barriers impede East Germans’ ability to migrate West: migration costs, their preference to live in the East, and fewer job opportunities received from the West. The estimated model highlights that the spatial barriers needed to generate the large wage gap between East and West are small relative to the frictions preventing the reallocation of labor across firms. Therefore, policies that directly promote regional integration lead to smaller aggregate benefits than equally costly hiring subsidies within region.

Date: 2019-12
New Economics Papers: this item is included in nep-ure
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Related works:
Working Paper: Spatial Wage Gaps in Frictional Labor Markets (2019)
Working Paper: Spatial Wage Gaps and Frictional Labor Markets (2019)
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