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Heterogeneous Labor and Agglomeration over Generations

Ryusuke Ihara

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: The productivity in cities is enhanced by the interaction between heterogeneous workers who are born and raised in various regions and countries. However, such benefit does not last forever because the composition of workers in cities becomes homogenized over generations. To evaluate the agglomeration economies and diseconomies of labor heterogeneity, this paper constructs a two-region non-overlapping generations model. Workers are assumed to be differentiated in terms of their birthplaces. Although they may migrate from their home regions to other regions to work as foreigners, they should incur an adjustment cost due to cultural differences. Assuming that the distribution of workers' births depends on their previous generation's residency choices, this study obtained the following results: (i) In the short run, residency choice leads workers to disperse across regions in each period. In the long run, however, the accumulation of residency choices over time makes birth distributions concentrated in a single region. Consequently, the composition of the workers becomes homogenized and they continue to reside in one region in a steady-state equilibrium. (ii) Social welfare is maximized by an even distribution of births involving a persistent circulation of heterogeneous labor. A comparison between the social optimum and the steady-state equilibrium indicates a dynamic inefficiency due to generational transition. (iii) When housing consumption is introduced as a dispersion force, social welfare can be maximized in a steady-state equilibrium with an equal distribution. (iv) Contrarily, even when another agglomeration economy is introduced on account of the quantity of labor, distribution of births in a steady-state equilibrium is still concentrated in comparison to the social optimum.

New Economics Papers: this item is included in nep-dge, nep-geo, nep-mig and nep-ure
Date: 2018-06
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