Working Paper: CEPR ID: DP1870
Authors: Peer Ritter; Uwe Walz
Abstract: Recent empirical work has shown that there exists a negative relation between wages and unemployment estimated across regions. Our model recognizes the spatial dimension of the so-called wage-curve by using a Hotelling/Salop framework in which a finite number of firms compete for heterogeneous workers. We incorporate this set-up into an efficiency-wage framework. In setting wages, firms perceive their influence on the wage-unemployment trade-off, thus taking the employment decisions of their competitors as an externality. The model predicts that in larger regions, with firms demanding more specialized labour, workers receive higher wages and face lower unemployment.
Keywords: Specialization; Heterogeneity of Labour; Efficiency Wages; Local Unemployment
JEL Codes: J21; J41; R23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| larger local labor markets (J49) | greater specialization among firms (L29) |
| greater specialization among firms (L29) | higher wages (J39) |
| greater specialization among firms (L29) | lower unemployment rates (J68) |
| larger local labor markets (J49) | higher wages (J39) |
| larger local labor markets (J49) | lower unemployment rates (J68) |