Large Locational Differences in Unemployment Despite High Labor Mobility: Impact of Moving Cost on Aggregate Unemployment and Welfare

Damba Lkhagvasuren

No 9009, Working Papers from Concordia University, Department of Economics

Abstract: In the U.S., the cross-state differences in unemployment rates are large - for instance, large compared to variations in the national unemployment rate over time. At the same time, there is considerable labor mobility within the U.S.; in fact, enough that, if migration arbitrages differences in unemployment, one might expect very low cross-state differences in unemployment. This paper develops a multi-sector equilibrium model that can account for high cross-state mobility and large variability in unemployment rates across states. The model allows for explicit treatment of net and gross mobility across local labor markets and within-market job search frictions. The prediction of the model is consistent with procyclicality of gross mobility in the U.S.. The model generates a striking result: that unemployment is a U-shaped function of moving cost. However, evaluated at moving costs which are empirically relevant, a marginal decrease in the moving cost reduces aggregate unemployment. Using the model, several policy experiments are conducted. These show that the government can reduce aggregate unemployment substantially by subsidizing workers' moving expenses. Such policy is welfare-improving despite being financed by taxes imposed on workers. The model also provides insights into the impacts of homeownership, city size, and an aging population on aggregate unemployment.

Keywords: Labor Mobility; Regional Labor Markets; Unemployment; Vacancies; Moving Cost; Island Models; Competitive Search Models (search for similar items in EconPapers)
JEL-codes: E30 E60 J60 R11 R13 R23 R28 (search for similar items in EconPapers)
Pages: 5 pages
Date: 2009-07, Revised 2010-03
New Economics Papers: this item is included in nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:crd:wpaper:09009

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