Efficiency Wages and Unemployment in Cities: The Case of High Relocation Costs

Yves Zenou

No 4058, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop an urban model in which all jobs are located in the Central Business District (CBD) and workers, who have high relocation costs, optimally choose their residence between the CBD and the city-fringe. We consider two cases. In the first one, firms can pay different wages according to residential location (this is referred to as the unconstrained equilibrium) while in the second case, there is a legal constraint that prevents firms to wage-discriminate on the basis of residential location (this is referred to as the constrained equilibrium). We show that in the unconstrained equilibrium, the efficiency wage in fact increases with distance to jobs. We also demonstrate that both workers and firms are better off in the unconstrained equilibrium. Finally, we show that a policy that reduces the unemployment benefit decreases unemployment but, interestingly, has an ambiguous effect on utilities in both equilibria. Moreover, this policy has no impact on the land rent in the unconstrained equilibrium but increases the competition in the land market in the constrained equilibrium.

Keywords: Relocation costs; Location-dependent wages; Urban labour markets (search for similar items in EconPapers)
JEL-codes: J41 R14 (search for similar items in EconPapers)
Date: 2003-09
New Economics Papers: this item is included in nep-geo, nep-lab and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Journal Article: Efficiency wages and unemployment in cities: The case of high-relocation costs (2006)
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