Working Paper: NBER ID: w24632
Authors: Pablo Fajgelbaum; Cecile Gaubert
Abstract: We study optimal spatial policies in a quantitative trade and geography framework with spillovers and spatial sorting of heterogeneous workers. We characterize the spatial transfers that must hold in efficient allocations, as well as labor subsidies that can implement them. There exists scope for welfare-enhancing spatial policies even when spillovers are common across locations. Using data on U.S. cities and existing estimates of the spillover elasticities, we find that the U.S. economy would benefit from a reallocation of workers to currently low-wage cities. The optimal allocation features a greater share of high skill workers in smaller cities relative to the observed allocation. Inefficient sorting may lead to substantial welfare costs.
Keywords: optimal spatial policies; spillovers; spatial sorting; welfare; labor subsidies
JEL Codes: F12; H21; H71; R13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| spatial policies (R28) | reallocation of workers to low-wage cities (R23) |
| reallocation of workers to low-wage cities (R23) | enhanced welfare (I38) |
| spatial transfers (F16) | allocation of high-skill workers to smaller cities (R23) |
| allocation of high-skill workers to smaller cities (R23) | wage inequality (J31) |
| allocation of high-skill workers to smaller cities (R23) | welfare (I38) |
| optimal allocation (D61) | greater share of high-skill workers in smaller cities (R23) |
| inefficient sorting (C69) | substantial welfare costs (H53) |
| optimal transfers (F16) | mitigate inefficiencies caused by spatial disparities (R12) |
| optimal allocation (D61) | lower wage inequality in larger cities (J79) |
| optimal allocation (D61) | diminished urban skill premium (R11) |