Spatial Wage Gaps in Frictional Labor Markets

89 Pages Posted: 17 Dec 2019

See all articles by Tommaso Porzio

Tommaso Porzio

Yale University

Sebastian Heise

Federal Reserve Bank of New York

Date Written: December 2019


We develop a job ladder model with labor reallocation across firms and regions, and estimate it on matched employer-employee data to study the large and persistent real wage gap between East and West Germany. We find that the wage gap is mostly due to firms paying higher wages per efficiency unit in West Germany and quantify a rich set of frictions preventing worker reallocation across space and across firms. We find that three spatial barriers impede East Germans' ability to migrate West: migration costs, their preference to live in the East, and fewer job opportunities received from the West. The estimated model highlights that the spatial barriers needed to generate the large wage gap between East and West are small relative to the frictions preventing the reallocation of labor across firms. Therefore, policies that directly promote regional integration lead to smaller aggregate benefits than equally costly hiring subsidies within region.

Suggested Citation

Porzio, Tommaso and Heise, Sebastian, Spatial Wage Gaps in Frictional Labor Markets (December 2019). CEPR Discussion Paper No. DP14197, Available at SSRN:

Tommaso Porzio

Yale University ( email )

New Haven, CT 06520
United States

Sebastian Heise (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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