Regional Equilibrium Unemployment Theory at the Age of the Internet
46 Pages Posted: 7 May 2015
Date Written: April 30, 2015
This paper studies equilibrium unemployment in a two-region economy with matching frictions, where workers and jobs are free to move and wages are bargained over. Job-seekers choose between searching locally or searching in both regions. Search-matching externalities are amplified by the latter possibility and by the fact that some workers can simultaneously receive a job offer from each region. The rest of the framework builds upon Moretti (2011). Increasing the matching effectiveness out of the region of residence has an ambiguous impact on unemployment rates. While it reduces the probability of remaining unemployed, it also decreases labor demand because of a lower acceptance rate. We characterize the optimal allocation and conclude that the Hosios condition is not sufficient to restore efficiency. A numerical exercise indicates that the loss in net output is non negligible and rising in the matching effectiveness in the other region.
Keywords: matching, non-segmented labor markets, spatial equilibrium, regional economics, unemployment differentials
JEL Classification: J610, J640, R130, R230
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