Regional Equilibrium Unemployment Theory at the Age of the Internet

45 Pages Posted: 4 Dec 2013

See all articles by Vanessa Lutgen

Vanessa Lutgen

Catholic University of Louvain (UCL)

Bruno Van der Linden

Université Catholique de Louvain - Institut de Recherches Economiques et Sociales; IZA Institute of Labor Economics

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Abstract

This paper studies equilibrium unemployment in a two-region economy where homogeneous workers and jobs are free to move and the housing market clears. Because of the Internet, searching for a job in another region without first migrating there is nowadays much simpler than in the past. Search-matching externalities are amplified by this possibility and by the fact that some workers can simultaneously receive a job offer from each region. The rest of the framework builds on Moretti (2011). We study numerically the impacts of various local shocks in a stylized US economy. Contrary to what could be expected, increasing matching effectiveness in the other region yields growing regional unemployment rates. We characterize the optimal allocation and conclude that the Hosios condition is not sufficient to restore efficiency. In the efficient allocation, the regional unemployment rates are much lower than in the decentralized economy and nobody searches in the other region.

Keywords: matching, search then move, spatial equilibrium, regional economics, unemployment differentials

JEL Classification: J61, J64, R13, R23

Suggested Citation

Lutgen, Vanessa and Van der Linden, Bruno, Regional Equilibrium Unemployment Theory at the Age of the Internet. IZA Discussion Paper No. 7763. Available at SSRN: https://ssrn.com/abstract=2363265

Vanessa Lutgen (Contact Author)

Catholic University of Louvain (UCL) ( email )

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

Bruno Van der Linden

Université Catholique de Louvain - Institut de Recherches Economiques et Sociales ( email )

3, Place Montesquieu
Louvain-la-Neuve, 1348
Belgium

HOME PAGE: http://perso.uclouvain.be/bruno.vanderlinden/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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