On the geography of inequality: labour sorting in general equilibrium

Santiago Truffa and Alexis Montecinos

Spatial Economic Analysis, 2024, vol. 19, issue 3, 324-344

Abstract: We study how cities’ amenities and limited housing supply contribute to aggregate wage inequality and affect housing prices through the sorting of heterogeneous skilled workers. We develop a general equilibrium model where workers differ along a continuum of skills and compete for limited housing. Our analysis suggests that spatial sorting accounts for 7.5% of the aggregate wage dispersion, increases average housing prices by 20–40% in constrained cities, and makes the economy 1.9% more productive. In addition, we evaluate a place-based policy that aims to expand the supply of houses in 1% of constrained cities and find that it improves aggregate productivity between 0.2% and 0.4%. However, the place-based policy has the unintended consequence of aggravating aggregate wage inequality by the same magnitude.

Date: 2024
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DOI: 10.1080/17421772.2023.2271519

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