Urban Unemployment, Agglomeration And Transportation Policies

Abstract:     
We study the role of unemployment in the context of the endogeneous formation of a monocentric city in which firms set efficiency wages to deter shirking. We first show that, in equilibrium, the employed locate at the vicinity of the city-center, the unemployed reside at the city-edge and firms set up in the city-center. We then show that there is a "spatial mismatch" between location and jobs because the further away from jobs the unemployed, the larger the level of unemployment. Finally, we derive some policy implications. We show that a policy that improves the city transportation network (by subsidizing the commuting costs of all workers) reduces urban unemployment, increases utilities of all workers but raises inequality, whereas a policy that supports the transportation of the unemployed only (by subsidizing their commuting costs) increases urban unemployment, does not always raise workers' utilities but reduces inequality.
commuting costs

Keywords: Efficiency wages, Spatial mismatch, Endogeneous location of workers and firms, Urban unemployment, Subsidizing

JEL Classification: J64, R14

Accepted Paper Series