Inefficient Equilibrium Unemployment in a Duocentric Economy with Matching Frictions

Etienne Lehmann (), Paola Liliana Montero Ledezma () and Bruno Van der Linden

No 7828, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This article examines unemployment disparities and efficiency in a densely populated economy with two job centers and workers distributed between them. We introduce commuting costs and search-matching frictions to deal with the spatial mismatch between workers and firms. In equilibrium, there exists a unique threshold location where job-seekers are indifferent between job centers. In a decentralized economy job-seekers do not internalize a composition externality they impose on all the unemployed. Their decisions over job-search are thus typically not optimal and hence the equilibrium unemployment rates are inefficient. We calibrate the model for Los Angeles and Chicago Metropolitan Statistical Areas. Simulations exercises suggest that changes in the workforce distribution have non-negligible effects on unemployment rates, wages and net output.

Keywords: urban unemployment; commuting; spatial mismatch; externality; United States (search for similar items in EconPapers)
JEL-codes: J64 R13 R23 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2013-12
New Economics Papers: this item is included in nep-dge, nep-geo and nep-lab
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Published - published in: Journal of Urban Economics, 2016, 91, 26-44.

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Working Paper: Inefficient equilibrium unemployment in a duocentric economy with matching frictions (2013)
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