Working Paper: CEPR ID: DP1566
Authors: tony e smith; yves zenou
Abstract: In this paper a two-sector model of urban unemployment is developed which focuses on the formation of a secondary sector under conditions in which a demand shock in the primary sector leads to a sharp increase in unemployment. The optimal location in the secondary sector is shown to be at the edge of the city, giving rise to a multicentric urban spatial structure. Within this spatial structure, we establish conditions under which the new labour market equilibrium involves not only a decrease in unemployment, but also an increase in net income for those unemployed. These results are extended to the case in which all unemployment benefits are financed by local taxation of firms. In this context, it is shown that when taxation discourages entry of a secondary sector, there may be profit incentives for the primary sector to subsidize the entry of a secondary sector.
Keywords: efficiency wage; minimum wage; edge city location; taxation
JEL Codes: J41; R14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Demand shock in the primary sector (Q11) | Increase in unemployment (J64) |
| Increase in unemployment (J64) | Entry of secondary sector (L79) |
| Entry of secondary sector (L79) | Decrease in unemployment (J68) |
| Entry of secondary sector (L79) | Increase in net income for the unemployed (J65) |
| Taxation of firms (H32) | Entry of secondary sector (L79) |
| Taxation of firms (H32) | Dynamics of unemployment (J64) |