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Equilibrium Search Unemployment with Explicit Spatial Frictions

It has been recognized fora longtime that distance interacts with the diffusion of information. In his seminal contribution to search, Stigler (1961) puts geographical dispersion as one of the four immediate determinants of price ignorance. The reason is simply that distance affects various costs associated with search. Inmost search models, say for example Diamond (1981 and 1982), distance between agents or units implies a fixed cost of making another draw in the distribution. In other words, a spatial dispersion of agents creates more frictions and thus more unemployment. Conventional labour economics faces difficulties in thinking about these spatial differences because it is biased towards the notion of a spaceless market place ruled by the walrasian auctioneer.

This is a weakness of the analysis since empirical evidence supports the idea of a clear spatial dimension of labour markets (see for example the literature survey by Crampton, 1999). There are in fact several channels through which space affects the labour market. First, workers who live further away from jobs may have poorer labour market information and be less productive than those living closer to jobs (Seater, 1979). This is particularly true for younger and/or less-skilled workers who rely heavily on informal search methods for obtaining employment (Holzer, 1987).

The reliance on these informal methods of job search suggests that information on available job opportunities may decay rapidly with the distance from home (Ihlanfeldt and Sjoquist, 1990). Second, distance also implies higher commuting costs for the unemployed, which directly affect the search process (Van Ommerenetal., 1997). Third, workers residing too faraway from jobs may quit their job more frequently because of too long commuting distances (Zax and Kain, 1996). Finally, employers may discriminate against applicants living in remote areas because of lower productivity (Zenou, 2002). As a result it is commonly observed that unemployment rates differ strongly across as well as within local labour markets (seee.g. Blanch flower and Oswald, 1994, Martson, 1985, To pa, 2001).

The interaction between space and labour markets is thus complex. We have divided our research questions into two parts. In a companion paper (Wasmer and Zenou, 2002), the focus was mainly urban and we have explicitly studied all possible urban configurations in a job-matching framework. We have in particular shown how a public transportation policy strongly depends on which type of urban equilibrium prevails.

Equilibrium Search Unemployment with Explicit Spatial Frictions