On The Labor Market Inequalities Across Regions

Wages, unemployment and the labor market size vary considerably across regions in U.S. To explain these differences I develop a general equilibrium model in which each region is characterized by a labor market with search frictions: workers search for a job both when unemployed and when employed and firms post wages that maximize their profits. Firms and workers decide where to locate given labor market conditions in each region. Central to their decisions are the probabilities of finding a productive match. These probabilities are derived from a meeting technology that displays increasing returns of scale and is endogenously given by the number of workers and firms in each market. Workers and firms are assumed to be equally productive, however workers differ in the way that they value each region. Within this framework equilibria with unequal and non-empty labor markets can arise even for equally productive workers and firms. The model predicts a positive relationship between wages and markets size and a negative relationship between unemployment and size for a group of identical workers. Both relationships are supported by empirical literature.

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