Full Citation
Title: The Great Divergence with Frictional Labor Markets
Citation Type: Miscellaneous
Publication Year: 2023
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Abstract: Since the 1980s, US cities with a growing share of high-skill workers have experienced higher growth in wages and rent than cities with a declining share of high-skill workers. I document novel empirical facts about this "Great Divergence" showing that high-skill, high-rent cities also experience a reduction in long-run unemployment rates. Since wage and unemployment rates are jointly determined , incorporating geographic variation in unemployment rates is quintessential in understanding the welfare implication of this divergence. This paper develops a spatial equilibrium model with frictional labor markets that give rise to unemployment, featuring workers of different skill levels that share a housing market. I calibrate the model to the US economy between 2005 and 2019 and find that the worker population is inefficiently small in high-wage, high-rent locations. The share of high-skill workers in these locations is inefficiently high. This misallocation is caused by the distortion resulting from the inseparability between the labor market and housing market location. Comparing the model to its competitive counterpart without unemployment shows that search frictions moderate the divergence, allowing an additional channel to balance the spatial equilibrium, leading to smaller utility differences between high-and low-skill workers. Policies that encourage low-skill workers to relocate to high-wage locations improve aggregate welfare.
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Authors: Liao, Bessy
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Data Collections: IPUMS USA
Topics: Education, Housing and Segregation, Work, Family, and Time
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